ECB sticks with QE but lifts its growth forecast

THE European Central Bank (ECB) raised growth and inflation forecasts for the euro area yesterday but stuck to its pledge to provide stimulus for as long as needed, predicting inflation would remain below target into 2020.

The ECB kept its key rates on hold and also held rigidly to its script on its intentions for next year – despite pressure from some policymakers to acknowledge explicitly the strength of the Eurozone recovery and more closely follow the US Federal Reserve’s tightening trend.

The euro rose to a day’s high of $1.186 after the bank raised its growth forecasts from this year through to 2019.

There was also a modest upgrade of price expectations, though inflation was predicted at just 1.7pc in 2020 – short of its official target of close to 2pc.

“All in all the revision of the macroeconomic projections is going in the right direction,” ECB President Mario Draghi told a news conference, noting that the inflation outlook was still muted and thus required “ample” stimulus. So while growth and inflation forecasts were raised, by big margins in some cases, the ECB did not even discuss changes to its policy stance or the guidance that serve to anchor expectations.

In a nuanced message, Mr Draghi added that he was more confident than two months ago that the inflation target could be reached and said he saw no negative effect from tightening by the US Federal Reserve, which announced its latest rate hike on Wednesday.

Six weeks after agreeing to halve asset buys from January, the ECB reiterated its commitment to continue bond purchases at least until the end of September, and to keep reinvesting cash from maturing debt until much later to support a rebound in growth and inflation. Having faced five years of anaemic price pressures, the ECB has deployed its entire policy arsenal, cutting rates into negative territory, giving banks cheap loans and hoovering up bonds with an unprecedented €2.55 trillion of purchases.

Its work has paid off as the Eurozone recovery is now well into its fifth year thanks to nine million new jobs, letting policymakers curb stimulus from next year and raising the prospect that the lavish bond buys it started in early 2015 could finally end.

But the economic run is stronger than most have expected.

That in turn is fuelling arguments among more conservative policymakers that the ECB is moving too slowly and should be more decisive in signaling the end of quantitative easing to preserve its remaining firepower after the crisis tested its limits. (Reuters)