Tue | Sep 26, 2017

European Central Bank won't call time on stimulus just yet

Published:Friday | June 9, 2017 | 6:00 AM
The European Central Bank

The European Central Bank (ECB) took small steps Thursday towards phasing out its extraordinary support measures for the economy, but made it clear the recovery still needs backing from the bank despite its growing strength.

The bank's president, Mario Draghi, was careful not to give a clear signal about when it will start withdrawing stimulus - a measure of the bank's caution about the potential impact such an announcement could have on financial markets.

The bank kept interest rates and its bond-purchase stimulus programme unchanged at a meeting of its 25-member governing council.

The council made a small concession to the improving economy in the 19 countries that use the euro by dropping from its statement wording that it could lower interest rates further. Draghi made another tweak by saying risks to growth are now "broadly balanced" - a change from the April meeting when risks were "tilted to the downside".

Analyst Carsten Brzeski at ING-DiBa described the bank's statement as "a very first baby step towards tapering" the stimulus effort.

The bank left its bond-purchase stimulus programme unchanged at €60 billion (US$67 billion) per month through to at least the end of the year, and longer if necessary. The measure pumps newly printed money into the economy in an effort to raise inflation towards the bank's goal of just under two per cent, considered best for the economy. Right now, inflation is an annual 1.4 per cent.

Analysts think the bond purchases will be tapered next year, but the bank has moved gingerly in indicating when it might be ready to announce a schedule for reducing and then ending them.

Ending the bond purchases and raising interest rates could have wide-ranging effects, such as a stronger euro and higher interest costs for heavily indebted governments. It would also raise returns on savings accounts and bank CDs and make them more attractive relative to stocks and riskier investments.

ECB officials are concerned that markets would respond to a premature announcement that the stimulus is coming to an end by sending interest rates higher, blunting its effects.

Evidence is piling up that growth in the Eurozone has kicked into a higher gear, and the region is recovering from the Great Recession and the ensuing crisis over high debt that pushed some Eurozone countries, notably Greece, to the brink of bankruptcy. Earlier Thursday, the Eurostat statistics agency revised figures for first-quarter growth up to 0.6 per cent from 0.5 per cent.

Draghi conceded that recent data suggest "a stronger momentum in the euro-area economy, which is projected to expand at a somewhat faster pace than previously expected".

The sticking point is inflation, which remains weak. Unemploy-ment is falling, but wages aren't picking up as many people take part-time or lower-wage jobs. Draghi said inflation indicators "have yet to show convincing signs of a pickup".

Draghi said that the brighter outlook is largely a result of the bank's efforts and the economy still needs central bank support. Thanks to the bond purchases, "five million jobs have been created in the Eurozone in the last three and a half years," he said. "More jobs than anywhere else in the world, I think, certainly more than in the United States."

Though inflation in the Eurozone is higher than it was for much of the past two years, that's largely because of a pickup in oil prices. The ECB doesn't expect a big increase in inflation over the coming two years.

On Thursday, the bank lowered its forecasts for Eurozone inflation this year to 1.5 per cent from 1.7 per cent, and for next year to 1.3 per cent from 1.6 per cent.

The central bank's statement kept important wording that

its bond-buying stimulus programme could be stepped up if the economic outlook worsens. While few expect that to happen, the words underline that the bank is not yet willing to call time on the stimulus programme.

The bank kept its short-term benchmark rate at a record low of zero. It is also charging banks negative interest of 0.4 per cent on excess cash parked at the ECB. That is, in effect, a tax aimed at pushing them to lend the money instead of hoard it.

- AP