European Central Bank moves cautiously to phase out stimulus measures

The European Central FRANKFURT Bank took small steps Thursday toward 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 program 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 INGDiBa described the bank’s statement as “a very first baby step toward tapering” the stimulus effort.

The bank left its bond purchase stimulus program unchanged at 60 billion euros (US$67 billion) per month through 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 toward 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.