Belfast Telegraph

UK Website Of The Year

ECB officials saw initial impact from Brexit vote as largely contained

Published 18/08/2016

The European Central Bank saw the initial impact from Britain's vote to leave the EU as largely confined to that country
The European Central Bank saw the initial impact from Britain's vote to leave the EU as largely confined to that country

Officials at the European Central Bank saw the initial impact from Britain's vote to leave the EU as largely confined to that country despite much uncertainty about whether it would hurt the global economy in the future, a report shows.

That is the view contained in the written account of the eurozone central bank's July 21 rate-setting meeting, released on Thursday.

The ECB had left unchanged its stimulus policies, which include 80 billion euro (£68 billion) a month in bond purchases and a benchmark interest rate of zero.

The officials sought to balance the need to reassure markets that they would add more stimulus if needed against ongoing uncertainty about how much the British vote would actually hurt the economy. The bank said it would wait to get more data from its staff's forecasts.

Members of the 15-member governing council wanted to make it clear they would not stand idly by in case of trouble, without on the other hand raising expectations for more stimulus and "fostering undue expectations about the future course of monetary policy".

Financial markets had weathered the initial surprise from the vote to leave, the officials agreed.

But they were concerned about the longer term impact on neighbouring Europe, a major trade partner.

Britain's exit from the EU and its tariff-free single market would require a renegotiation of trade relations, something that was likely to take years, leaving uncertainty for businesses.

The ECB officials noted "that the uncertainty of the situation itself could affect the global economy in deeper and less predictable ways than through the direct trade channel".

The bank's wait-and-see stance contrasts with that of the US Federal Reserve, which is looking to raise interest rates further from current very low levels. Minutes of the Fed's July 26-27 meeting indicated some officials thought another increase would soon be warranted. Others were unwilling to consider that. The Fed has put off further increases since a quarter-point hike in December to its key rate to a range of 0.25%-0.50%.

The ECB is in a different situation, with more moderate economic growth that is bringing down high unemployment more slowly than many would like.

Some analysts think the ECB will eventually provide more stimulus on top of its bond purchases and extremely low interest rates, which include a negative rate of 0.4% on deposits left with it overnight by commercial banks.

The 19 countries that use the euro saw economic growth of 0.3% in the second quarter. Inflation at 0.2% is low and regarded as a sign of weak demand, while unemployment remains high at 10.1%.

The eurozone also faces worries about its banks, especially in Italy. Bad loans and low profits continue to burden the financial system. Very low interest rates squeeze the profit margin between the rates banks can borrow and their lending rates. That is worrying because European companies rely mostly on banks for credit, instead of financial markets as in the US.

Officials indicated they were keeping an eye on slumping bank stocks in case that weakened banks' ability to pass on the ECB's low rates to businesses.

AP

Read More

From Belfast Telegraph