ECB Takes Opposite Direction to Fed, Rates to Remain Unchanged

ECB's Nowotny says bank subsidies should not become a permanent instrument

The dovish signals from major central bank set the context for Thursday's ECB meeting, which could see some action in the form of details on a new round of cheap, multi-year loans to banks.

LONDON, June 4 (Reuters) - Germany's 10-year government bond yield held near record lows on Tuesday after a rate cut in Australia and rising bets on US monetary easing soon reinforced expectations of a dovish policy stance at this week's European Central Bank meeting.

"Below this limit, the size of the decrease in the interest rate will be graduated linearly depending on the percentage by which a counterparty exceeds its benchmark stock of eligible loans".

"More importantly he did say rates are not going anywhere until 2020, potentially even longer... that doesn't really help banks".

"Counterparties will receive the maximum rate reduction if they exceed their benchmark stock of eligible loans by 2.5% as at 31 March 2021", the European Central Bank said.

He told reporters that "several members" of the Governing Council, which includes the 19 governors of the eurozone central banks and the six members of the Executive Board, defended the possibility of rate cuts for the deposit facility.

Draghi laid out the latest set of European Central Bank quarterly economic forecasts, which called for growth of 1.2 percent and inflation at 1.3 percent this year, slightly higher than in its March predictions for the 19-nation eurozone.

"Core" inflation, which excludes volatile items like food and energy, is still weaker.

Inflation forecasts were also tweaked at Philip Lane's first policy meeting as ECB Chief Economist.

More news: PM Narendra Modi arrives in Maldives on 1st foreign visit after re-election

Both were created to increase lending, economic growth and ultimately inflation.

"The risk has grown of inflation expectations becoming "de-anchored" from the ECB's target, said Eric Dor of France's IESEG business school.

On top of overseas threats, worries closer to home include a budget confrontation between Brussels and Rome, elections in Greece and a possible no-deal Brexit, following the looming departure of British Prime Minister Theresa May.

With hoped-for solutions to some of the knotty issues failing to materialize in recent weeks and months, "uncertainty about global trade growth has extended beyond what we believed in March", Draghi said.

"The policy space is there", Draghi said, although "we have not discussed which contingency would call for which instrument".

But this year, the ECB's forecasts prices to rise 1.3%, 1.4% next year and 1.6% in 2021.

They also expect the bank's next move to entail policy easing rather than tightening.

Adding that it had been hard for European Central Bank to stay positive amid a basket of tempestuous data, an investment director at Fidelily, Andrea Iannelli said, "It would have been very, very hard for the European Central Bank to out-dove the market and push yields even lower".

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