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ECB Sees More Delay In First Post-crisis Rate Hike, Unveils New Longterm Loans

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The European Central Bank signaled on Thursday that the euro area interest rates are set to remain unchanged for the rest of this year and beyond, until inflation converges with its target, and announced a new round of long-term loans for banks to boost lending in the slowing economy.

The Governing Council, led by ECB President Mario Draghi, left the key interest rates unchanged after the policy session in Frankfurt, as expected.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is at 0.25 percent.

Eurozone interest rates were raised last in July 2011 by 25 basis points.

"The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term," the ECB said.

The subtle change in the forward guidance on interest rates from the "summer" of 2019 to "the end" suggests the first interest rate hike since the 2007-09 global financial crisis would happen only next year.

The bank said it will launch a new series of targeted longer-term refinancing operations, or TLTRO-III, starting in September 2019 and ending in March 2021, each with a maturity of two years.

The announcement of new TLTRO loans took most economists by surprise as they had expected the bank to only signal such a move this month and to unveil it in April.

"In our view, it is clearly an attempt to stay ahead of the curve and to avoid unwarranted tightening of the ECB's monetary stance. It is not an attempt to provide more easing," ING economist Carsten Brzeski said.

"At the same time, however, it is also a bit of a gamble as any next step from here to tackle a severe downswing of the economy would now require unprecedented measures."

The ECB expects the new loans to help to preserve favorable bank lending conditions and the smooth transmission of monetary policy.

Under TLTRO-III, counterparties will be entitled to borrow up to 30 percent of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation, the bank said.

Similar to the earlier TLTRO programme, the TLTRO-III will feature built-in incentives for credit conditions to remain favorable, the bank added.

The bank also said it intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates.

The ECB reiterated that this will help to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

Further, the central bank said Eurosystem's lending operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.

Draghi is set to hold his post-decision press conference at 8.30 am ET. He will unveil the latest set of macroeconomic projections from the ECB Staff, which is expected to reveal further downgrade to the euro area growth outlook.

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