ECB: Ultra-easy policy is here to stay

Bank dashes hopes for QE taper signal

FRANKFURT: The European Central Bank reaffirmed its ultra-easy policy stance yesterday, even keeping the door open to increasing bond purchases, dashing hopes it would formally signal its intent to claw back stimulus from next year.

The ECB kept key interest rates at record lows as expected.

The bank confirmed that asset buys would continue at €60 billion ($71.76 billion) per month at least until December and said it could even increase or expand the asset purchases if needed, sticking with its long-held super easy stance.

The statement is likely to rattle some investors who expected the ECB to start laying the groundwork for a cut in monetary stimulus because economic growth is robust, the threat of deflation long gone and unemployment falling fast — all supporting the case for removing at least some of the bank’s extraordinary measures.

Investor attention now turns to ECB president Mario Draghi’s news conference later yesterday, during which he might still offer at least some clues to the evolution of the bank’s view on stimulus and would also detail new economic projections.

“If the outlook becomes less favourable ... the Governing Council stands ready to increase the programme in terms of size and/or duration,” the ECB said in a statement.

The euro wobbled slightly on the lack of signals that the central bank may be gearing up to slow its buying, but like Europe’s main stock exchanges, it held on to most of the morning gains that had taken it back above $1.1975.

The key dilemma for Draghi in deciding whether to continue or wind down the asset purchases is that while economic growth is robust, inflation will remain under the ECB’s target of almost 2% for years to come given a sizeable slack in the labour market and the absence of meaningful wage growth.

Designed to cut borrowing costs, boost demand and raise inflation, the ECB’s 2.3 trillion asset purchase scheme has run for two and a half years now, successfully countering the threat of deflation but boosting consumer prices by less than the central

bank had hoped.

Though the bank has preferred to tailor its message by the smallest of increments, time is running out for a decision as the scheme is due to end in December,

requiring a decision at the Oct 26 or Dec 14 rate meetings.

Hawkish rate setters led by Germany argue that the scheme has reached its potential so it should be wound down. But

“doves” say that a rapid exit could tighten financial conditions too much, undoing the programme’s successes.

Part of the caution may be related to the euro’s 13% gain against the dollar this year.

While the rally in great part reflects the euro zone’s solid economic run, it exacerbates the ECB’s inflation problem by putting a natural lid on import costs and consumer prices.

The ECB was expected to lift its growth projections yesterday but cut the inflation outlook, indicating that price growth will miss its target at least through 2019 after already falling short for more than four years.

Analysts polled by Reuters predict no policy change yesterday and expect bond buys to be cut by one-third in a decision later this year.

At the news conference, the main question is whether Draghi will signal a policy shift that is now essentially expected by all investors. He is also certain to face questions about the firming euro.

Draghi is seen as certain to ask the ECB’s committees to prepare policy options for the coming meetings, a signal that has in the past preceded actions.

But policymakers’ hands are increasingly tied as the asset buys are slowly running up against the ECB’s self-imposed rules.

Abandoning the rules would be legally difficult while including new assets in the scheme would risk sending the wrong signal, some economists argue.