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European Bank Stocks Slide as ECB Leaves Rates Unchanged

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Amid the optimism with regard to improving economic conditions, the European Central Bank (“ECB”) decided to keep the key interest rates unchanged. Also, despite upward revision, the projected inflation rate remained below the central bank’s target of 2%.

"Risks surrounding the euro area growth outlook remain broadly balanced," said ECB President Mario Draghi. He also pointed out that the economy is benefitting from increase in business investments, improved profits and rising demand.

Draghi also hinted that the strengthening of labor market has led to increase in consumption. He added, "The economic expansion in the euro area continued in the third quarter of 2017, when real GDP increased by 0.6 percent quarter-on-quarter, after 0.7% in the second quarter." Further, the central bank on Thursday raised the guidance for GDP growth in the coming years.

The forecasts for 2017, 2018 and 2019 were raised to 2.4%, 2.3% and 1.9%, respectively. Further, it gave the first forecast for 2020 of 1.7%.

Moreover, ECB reiterated the cutdown in its net asset purchases to €30 billion and also confirmed to reinvest the proceeds of any bonds that mature in the period till September 2018.

Here are the key takeaways:


Though Draghi is confident that the current monetary policy is on the right track to achieve the target inflation rate of 2%, the closest projection to the target disclosed was 1.7% for 2020. Further, the central bank also expects the inflation rates for 2017, 2018 and 2019 to be 1.5%, 1.4% and 1.5%, respectively.

The rate for 2018 has been revised upward from 1.2%, after considering the rising oil and food prices.

Asset Purchase Program

The central bank will continue to purchase bonds from January 2018 but at a reduced rate of €30 billion per month, instead of €60 billion, til September 2018. The time period and amount will be raised if the financial indicators stop showing signs of improvement.

Finally, ECB said that it would be reinvesting the principal payments from maturing securities purchased even after the end of the net asset purchases and is necessary even longer.

Investors’ Reaction

The central bank’s decision to keep rates stable disappointed investors expecting hikes on the likely strengthening of economic activity. Notably, Deutsche Bank (DB - Free Report) and Lloyds Banking Group plc (LYG - Free Report) shares lost nearly 1% while shares of Societe Generale Group (SCGLY - Free Report) , BNP Paribas SA (BNPQY - Free Report) were down more than 1% following the central bank’s announcement.

BNP Paribas, Lloyds and Deutsche Bank has a Zacks Rank #3 (Hold), whereas Societe Generale carries a Zacks Rank #4 (Sell).

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