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ECB signals ultra-cheap debt era is almost over

Mario Draghi has given the clearest indication yet that the era of record low borrowing costs is drawing to a close.
The European Central Bank (ECB) ruled out further interest-rate cuts yesterday, in a sign that it’s moving towards the final chapter of a vast stimulus program that pumped cheap cash into the financial system in a bid to boost the euro area economy.
Borrowers in Ireland with tracker mortgages and the Irish State have been among the big beneficiaries from the policy, seeing their interest bills fall to extraordinarily low rates for a sustained period.

The ECB kept the euro area’s main interest rate at zero yesterday, and rate rises are not on the cards this year. However, yesterday’s comments by Mario Draghi point to a normalisation in monetary policy that could herald a period of painful adjustment for hundreds of thousands of households here.
Even so, in the meantime the deposit rate the ECB now charges banks to hold cash overnight was kept unchanged at minus 0.4pc. The central bank will continue to buy €60bn of bonds, including government debt, each month until at least the end of the year.

The ECB Governing Council met in Tallinn, Estonia, yesterday, where it formally dropped its guidance that interest rates might fall further, saying only that it now expects borrowing costs to stay at present levels for an extended period. Policymakers reiterated a pledge to increase the size or duration of their bond-buying program if the economy deteriorates, though with data showing an upswing in the economy that now appears unlikely.
The next big deadline for the ECB is September, when it must decide whether to continue bond buying into 2018 or start winding down, or tapering, the policy.

Tensions within the governing council have pitched so-called hawks led by the German members, who want to end emergency measures sooner, against doves nervous of pulling supports before growth is fully sustainable.
So far, the debate has only resulted in a change in language around interest rates, which was welcomed in Germany by allies of Chancellor Angela Merkel campaigning ahead of a general election there.

German Finance Minister Wolfgang Schauble told voters the ECB was now “on a path of gradually exiting from its ultra-loose monetary policy”.
“There was really no justification for the ECB to keep on holding on to that reference of the possibility of lower rates,” Vasileios Gkionakis, a strategist at UniCredit, told Bloomberg Television.

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