ECB Hints at End to Easy Money Policy
The European Central Bank on Thursday signalled greater confidence in the eurozone economy, as it took what analysts describe as a tentative step towards an exit from its easy-money policy.
Policymakers meeting in Estonian capital Tallinn decided to keep the bank's main refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent, and the deposit rate at -0.4 percent -- meaning lenders have to pay to park cash with the central bank -- a spokesman said.
But they also dropped a long-standing commitment to dropping rates yet further if necessary, indicating central bankers see reduced risk of economic shocks to the 19-nation single currency area.
Rates will "remain at their present levels for an extended period of time," the spokesman said.
The change in the bank's stance was widely expected among analysts, who believe it could be the first step towards the bank winding down its 60-billion-euro ($67.4 billion) per month bond-buying program next year.
Governing council members made no change to language suggesting that they could increase the pace of asset purchases if necessary to stimulate the eurozone economy.
Bond-buying and low interest rates were introduced at a time when the ECB feared deflation -- or steadily decreasing prices that undermine economic activity.
By pumping cash through the financial system and into the real economy, the bank believes it has stimulated growth and pushed inflation back towards its target of just below 2.0 percent.
Inflation has been on a rollercoaster ride in recent months, hitting the 2.0 percent target in February before falling back again in March.
The same pattern was repeated with a spike in April, to 1.9 percent, before a retreat in May.
Volatile food and energy prices are to blame for such rapid changes, policymakers say, while "core", or underlying inflation discounting those elements remains sluggish.
ECB president Mario Draghi argues wages -- which he dubs the "linchpin" of price growth -- are not rising fast enough to drive inflation.
At a press conference later Thursday, the central bank chief will present the latest ECB staff forecasts, widely expected to predict faster growth but slower inflation than previously thought in the coming years.
"Draghi is likely to highlight the continued weakness of core inflation and state that the pick-up in wage growth that the bank is looking for has still not come about," economist Jennifer McKeown of Capital Economics said.
- Balanced risks -
In its carefully-weighed policy statements, the central bank has long warned of risks threatening the eurozone recovery.
But with growth in the 19-nation eurozone at a healthy 0.5 percent between October and December and 0.6 percent in January to March, most observers believe the time has come to be less tentative.
"Hard data will likely convince the governing council to turn less cautious and formally upgrade its growth outlook," said Unicredit economist Marco Valli, predicting Draghi will offer a risk assessment Thursday "balanced" between positive and negative.
While the clearer horizon justified an end to talk of lowering interest rates, it does not herald a quick exit from bond-buying.
Draghi told European Parliament lawmakers in May he is "firmly convinced" the eurozone's newfound robustness depends on ECB interventions.
The bank is expected to keep buying 60 billion euros of bonds per month until the end of 2017, with a gradual winding down, or "tapering", of the purchases next year.
Meanwhile, policymakers have stuck to their insistence that any hike in interest rates will come well after the end of bond-buying.
ECB staff projections foreseeing lower inflation would lend support to governing council members who want to stay the course.
- Softly softly -
The ECB is keen to avoid financial market upsets as it heads for the exit from its bond-buying program.
Removing its demand for government bonds from the market could drive up yields, the returns investors can expect when buying government debt, for the eurozone's weaker economies.
But it is also under pressure to end the scheme, as some governing council members believe it is no longer justified without deflation risks.
Meanwhile, pressure from politicians in fiscally conservative countries like Germany is mounting over the impact on savers of simultaneous low rates and rising inflation.
German Finance Minister Wolfgang Schaeuble has also blamed the ECB for trade tensions with the United States, with Washington charging that the bank's policy makes German exports too cheap.
And technical considerations could soon limit the number of government bonds available for the ECB to buy, cramping the program's effectiveness.
Even given those constraints, "we expect President Draghi to stress at the press conference that policy tightening is a long way off," McKeown said.
Source: Agence France Presse
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