Euro Climbs Higher as ECB pushes back Interest Rate deadline;

Interest Rates

The euro climbed higher against the U.S. dollar on Thursday, after the European Central Bank (ECB) said it would delay its first post-crisis interest rate hike until at least the middle of next year.

In a move that was well-flagged, ECB President Mario Draghi  also offered to pay banks if they borrow cash from the central bank and pass it on to households and firms.

Trade tensions and fears of a global recession have put markets in a state of flux this week, with market participants increasingly hopeful ECB President Mario Draghi  could signal a late burst of monetary support before his term ends in October.

The central bank said interest rates on its marginal lending facility and deposit facility would remain unchanged at 0%, 0.25% and -0.40%, respectively. These have been at record lows following the euro sovereign debt crisis of 2011 in an effort to boost inflation and stimulate growth.

In a surprise revision to its forward guidance, the ECB said in a statement that the governing council “now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020.”

The euro climbed 0.6% to reach a seven-week high of $1.1290 at around 1:45 p.m.

“The prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets is leaving its mark on economic sentiment,” Draghi said, as he addressed reporters during a news conference in Vilnius, Lithuania.

“Looking ahead, the governing council is determined to act in case of adverse contingencies.”

Draghi explained the governing council “stands ready to adjust all its instruments as appropriate.” This should ensure inflation continues to move towards the ECB’s aim in a “sustained manner.”

Revised forecasts

Meanwhile, Draghi also presented a fresh round of forecasts for economic growth as well as inflation. According to the forecasts, the ECB sees GDP growth of 1.2 percent in 2019, up 0.1 percentage points from its previous forecast in March. For 2020, the ECB forecast the economy to grow at 1.4 percent, down 0.2 percentage points as compared to its previous forecast.

The ECB slightly raised its inflation forecasts for 2019 to 1.3 percent – up 0.1 percentage point from from its previous forecast in March. Meanwhile, for 2020, the ECB revised its forecast to 1.4 percent – down 0.1 percentage points from its earlier forecast in March.

“There is no probability of deflation, there is very low probability of recession, there are no threats of de-anchoring of inflation expectations,” Draghi said.