In­ter­na­tional, Page 23 ECB EASY MONEY STANCE RE­MAINS

Mario Draghi keeps rates at record lows, more as­set buys pos­si­ble

The Star Early Edition - - BUSINESS REPORT - Balazs Ko­ranyi and Frascesco Canepa

THE EURO­PEAN Cen­tral Bank (ECB) left its ultra easy mone­tary pol­icy stance un­changed as ex­pected yes­ter­day, keep­ing rates at record lows and even leav­ing the door open to more as­set buys if the out­look wors­ens.

Af­ter ECB chief Mario Draghi raised the prospect of pol­icy tight­en­ing last month, he sig­nalled that any pol­icy tweaks would come only grad­u­ally, set­ting the scene for a pos­si­ble dis­cus­sion in Septem­ber about a long-awaited ta­per­ing of its as­set buys.

“We need to be per­sis­tent and pa­tient be­cause we aren’t there yet, and pru­dent,” Draghi told his reg­u­lar news con­fer­ence af­ter a meet­ing of ECB pol­icy-mak­ers in Frankfurt.

He stressed that the bank’s gov­ern­ing coun­cil was unan­i­mous both on the de­ci­sion to keep its guid­ance un­changed and to avoid set­ting a pre­cise date for a dis­cus­sion of fu­ture pol­icy, not­ing only that it would oc­cur in the au­tumn.

With the euro zone econ­omy now grow­ing for the 17th straight quar­ter, its best run since be­fore the 2007-08 global fi­nan­cial cri­sis, that at least sug­gested the ECB is start­ing to con­tem­plate eas­ing off the ac­cel­er­a­tor, pre­serv­ing some fire power af­ter print­ing nearly €2 tril­lion (R29.77trln) to jump start growth.

The prospect of re­duced mone­tary stim­u­lus has kept fi­nan­cial mar­kets edgy, with in­vestors sift­ing through clues to gauge how big cen­tral banks around the globe will un­wind un­con­ven­tional poli­cies that have kept bor­row­ing costs at rock bot­tom.

The euro and govern­ment bond yields across the bloc ini­tially slipped af­ter the state­ment. But as Draghi spoke, the euro edged back above $1.15 level and euro zone bond yields gained, os­ten­si­bly on his con­fir­ma­tion of ex­pec­ta­tions that the ta­per would be dis­cussed in au­tumn.

The ECB ear­lier kept its de­posit rate deep in neg­a­tive ter­ri­tory and main­tained monthly bond pur­chases at €60bil­lion, in line with the ex­pec­ta­tion of most an­a­lysts. “If the out­look be­comes less favourable, or if fi­nan­cial con­di­tions become in­con­sis­tent with fur­ther progress to­wards a sus­tained ad­just­ment in the path of in­fla­tion, the gov­ern­ing coun­cil stands ready to in­crease the pro­gramme in terms of size and/or du­ra­tion,” it said.

Draghi sent bond yields and the euro sharply higher last month when he ar­gued that im­proved growth on its own would pro­vide ac­com­mo­da­tion so the ECB would tighten its own pol­icy to keep the over­all level of ac­com­mo­da­tion broadly un­changed.

The euro firmed more than 3 per­cent and Ger­man 10-year yields dou­bled since Draghi’s pol­icy hint. In­deed, the euro’s 11 per­cent rise this year will weigh on in­fla­tion, com­pound­ing the im­pact of a more than 10 per­cent drop in crude oil prices.

“As core in­fla­tion re­mains sub­dued, the ECB will likely pre­fer to err on the side of cau­tion, that is mov­ing more slowly rather than faster than many ob­servers project,” Hol­ger Sch­mied­ing at Beren­berg noted.

Still, the ECB is un­able to kick the can down the road in­def­i­nitely as its as­set buys are set to run un­til the end of the year and pol­i­cy­mak­ers ar­gue that a de­ci­sion on an ex­ten­sion or a grad­ual wind down must be taken in Septem­ber or October.

Pol­i­cy­mak­ers said ear­lier that they would not want to put an end date on the buys or a sched­ule on ta­per­ing, main­tain­ing flex­i­bil­ity and avoid­ing a per­cep­tion that it was on a pre­set course.

The big­gest headache for the ECB is the ap­par­ent dis­con­nect be­tween in­fla­tion and growth. – Reuters

PHOTO: BLOOMBERG

Mario Draghi, pres­i­dent of the Euro­pean Cen­tral Bank, cen­tre, ar­rives for a Eurogroup meet­ing of Euro­pean fi­nance min­is­ters in Lux­em­bourg last month. The bank left rates un­changed at yes­ter­day’s meet­ing.

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