ECB rate-setting meeting June 2019

Change in the European interest rate policy?

The European Central Bank (ECB) warns against economic fluctuations that could prove to be dangerous for financial markets. Therefore, the ECB Vice-President, Luis de Guindos, mentions several factors that could reflect poorly on financial stability.

Risk factors mentioned for a possible recession are the trade conflict between the USA and China as well as over-indebted member states such as Italy. In the case of revaluation, financially weak companies would take an unfavourable position due to their high debt levels. The currently low profitability of European banks represents another major obstacle. The targeted objective of a return on equity of 6% in the following two to three years is far below the expectations of investors with 8-10%.

During the ECB’s rate-setting meeting, which was held on June 6th in Vilnius, current challenges were discussed. Main focus of this meeting was the extremely poor economic development throughout the euro-area. With an inflation rate of only 1,2 %, the actual objective of 2% during the month of May was not achieved by far. Based on this result, the economic forecast for the second half of the year does not look very promising.

Another key issue has been the aforementioned trade conflict of the USA with many parts of the world. Apart from issues with China, Donald Trump sends out clear signals to the EU with his apparent support of Brexit hardliners. Furthermore, European companies fear US sanctions in the case of disagreements, which is why the volatile crude oil market proves to be an additional cause for concern.

In summary, the results of the rate-setting meeting are an unchanged key interest rate, which should remain at its present zero level at least until 2020 and the maintenance of penalty rates for banks. According to experts, it remains to be seen how the ECB will further develop, especially in the event of an interest rate cut by US banks and the resulting euro appreciation.