Strong growth
European Central Bank stays the course with stimulus measures
With the eurozone economy showing strong growth, the European Central Bank left its interest rates and stimulus measures unchanged Thursday as it looks ahead to the delicate matter of ending its bond-purchase program next year.
The Bank of England also left its key rate unchanged at 0.5 per cent amid uncertainty about how Britain’s departure from the European Union, expected in March, 2019, will affect the economy.
Together, Thursday’s decisions show how the eurozone and Britain are moving more slowly than the U.S. Federal Reserve as the world’s leading central banks start to gingerly withdraw the massive stimulus measures they deployed against the 2007-09 financial crisis and the subsequent Great Recession.
The Fed on Wednesday raised its benchmark federal funds rate by a quarter-point to 1.25 to 1.50 per cent and signalled that three more hikes could come next year. The Fed is also withdrawing some of the stimulus from its years of bond purchases by letting some of its holdings run down.
Growth has been robust in the U.S. and stronger than expected in Europe, but the stimulus withdrawal has moved slowly. That’s because inflation in Europe and the U.S. remains lower than many would like. And central bankers are leery of startling financial markets that have been supported for years by the steady introduction of newly printed money into the financial system through bond purchases.
The ECB has tried to reassure markets that its stimulus efforts will be withdrawn slowly so as not to disrupt the economic recovery that saw the economy in the 19 countries that use the euro expand 2.6 per cent in the third quarter from the year before.
The bank’s 25-member governing council left its key benchmark for lending to banks unchanged at zero. The rate on deposits it takes from commercial banks remained at minus 0.4 per cent. That negative rate is a penalty imposed to push banks to lend the money, not let it pile up at the ECB. The bank decided in October to reduce its extraordinary monetary stimulus in the form of regular purchases of government and corporate bonds to 30 billion euros (US$35 billion) a month from 60 billion euros from January, and to extend them at least until September, or longer if necessary.
The bank raised its forecasts for inflation and growth as Draghi expressed “increasing confidence” that inflation will eventually turn up toward the goal of close to but below two per cent, the rate considered best for the economy.