No change to ECB rates

Meeting in Frankfurt on Thursday, policymakers at the European Central Bank agreed to not make any changes to the lender's record low interest rates and cheap loans to banks across the 19-member euro area.

The Governing Council of the ECB announced that the interest rate on the 'main refinancing operations' - the interest it charges to banks for money they borrow from the ECB - as well as the interest rates on its 'marginal lending facility' and the 'deposit facility' will remain unchanged at 0.00%, 0.25% and -0.40% respectively.

The Governing Council said it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time. 

Earlier this month, analysts had speculated that ECB President Mario Draghi might prepare markets for a gradual drying-up of the central bank's massive bond purchases - purchases which have many knock-on effects, including supporting stock market share prices, as institutional investors scramble to find somewhere to invest the wall of central-bank cash coming into their accounts as they sell their bond-holdings to the ECB.

Investors had been spooked by a Bloomberg report suggesting that the ECB was considering gradually phasing out its asset-buying scheme - due to end in March - in a process called tapering.

No changes to ECB's easy money policy

The Frankfurt-based central bank was quick to deny the Bloomberg report, but the rumors pushed up bond yields anyway, and served as a reminder of how volatile sentiment remains regarding the currency bloc's economic prospects.

"It's too soon for the ECB to provide any guidance on its exit strategy," Berenberg economist Florian Hense said, pointing out that the lender's ultra-loose monetary policy had been a critical pillar of confidence in the eurozone.

Hense was proven right. In a statement released Thursday afternoon, the ECB said: "Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim."

In other words, there won't be any 'tapering' of ECB's massive purchases of bonds - most of them European government bonds - from secondary bond markets, a process often called 'quantitative easing' in finance jargon. 

Enough bonds around?

However, in the medium term, the bond-buying program may be in danger for technical reasons. The ECB's governing council has tasked some committees to examine ways to avoid running out of bonds to buy.

The tricky thing is that the ECB's own rules prevent the central bank from purchasing bonds with a yield below the rate of interest it pays to commercial banks on their deposits with the ECB, currently -0.4 percent - which is to say, the ECB actually charges interest to commercial banks that deposit money in their accounts at the central bank.

In addition, the ECB is prohibited from buying too many bonds from any one issuer - according to rules intended to protect the bank against potential accusations of monetary financing of government spending, which is prohibited by European treaty law.

Threats on the horizon

ECB governors put off decisions about any fresh stimulus measures until their December meeting. There are several potential upsets on the calendar next month that could strengthen the case for ECB making even greater efforts to use monetary policy to boost Europe's economy - insofar as that is even possible anymore: Many economists say what's really needed is fiscal measures, i.e. more spending by governments, especially on infrastructure. Fiscal measures are not within the ECB's powers. 

However, German and Dutch finance ministers, among others, remain opposed to fresh fiscal stimulus, so the ECB has tried to do what it can, within the legal constraints it faces, to use monetary measures to boost Europe's economies.

Threats on the horizon that could lead to additional pressure for either the ECB or governments, or both, to take stimulus measures include the possibility of worrying results from the upcoming US presidential election, as well as a constitutional referendum in Italy with Prime Minister Matteo Renzi under pressure.

And lurking in the background is the unquantifiable damage to eurozone economies from the UK's vote to leave the European Union. Britain was the euro area's second-largest export customer after the US in 2015, buying 13.5 percent of the bloc's goods sold abroad.

hg/jd (dpa, AFP, Reuters)