ECB keeps policy, guidance on hold
QE exit likely to have wide-ranging effects
FRANKFURT: The European Central Bank yesterday left its interest rates and policy stance unchanged amid predictions that it will soon start signaling a definite exit from its extraordinary stimulus efforts as the economy strengthens in the 19-country euro zone.
The bank’s 25-member governing council did not change its stance that its €30 billion ($36 billion) in monthly bond purchases will run at least until September and longer if necessary.
The purchases pump newly created money into the economy to raise inflation and growth in the wake of the 19-country euro zone’s crisis over high debt in member states like Italy and Greece.
Analysts are waiting for ECB president Mario Draghi’s news conference to see if he will offer any signal about whether the purchases will come to an abrupt end in September or continue, possibly at a lower pace.
The end of the stimulus will eventually have wide-ranging effects for many people. It would mean higher returns on savings accounts, currently negligible due to low market interest rates that result from the bank’s policies.
By raising yields on safer assets, the return to more normal monetary policy and interest rates could reduce the relative attractiveness of riskier investments like stocks.
Higher long-term rates would make it easier to fund pension plans and other forms of retirement savings.
But higher rates could add to pressure on indebted governments such as Italy, which would have to pay more interest on their borrowings.
The ECB remains far behind the US Federal Reserve, which has already started withdrawing stimulus aimed at overcoming the aftereffects of the financial crisis and the Great Recession.
The Fed has ended its own bond purchases and started withdrawing the resulting stimulus by letting its bond holdings shrink as the bonds mature and are paid off. It has also started raising interest rates as the US economy recovered more quickly than Europe did.
The statement left unchanged a promise
that the ECB could even step up the bond purchases if the economic outlook worsens. Such a scenario is now regarded as highly unlikely with growth indicators strong.
Analysts who follow the ECB think the
governing council might remove that wording as soon as their March 8 meeting to start preparing markets for an eventual end to the purchases.
Draghi is expected to be cautious in his
remarks. That is because any hint that the stimulus might face a definite end tends to send the euro’s exchange rate higher against other currencies.
And that would keep inflation low by lowering the cost of imports, as well as hurting growth by making euro zone exporters’ goods more expensive abroad.
Investors could also start adjusting to expectations of higher central bank interest rate benchmarks by sending market rates higher, prematurely blunting some of the effect of the stimulus.
Draghi has had to resist stimulus sceptics such as German board member Jens Weidmann, who have called for an end to the purchases.
In recent weeks several other board members have also made remarks suggesting a stimulus end is on the table.
The bond-buying stimulus has driven down long-term interest rates to extremely low levels, making borrowing easier for companies and in theory supporting growth and inflation.
Growth has picked up strongly while inflation has lagged at 1.4% annually in December, below the bank’s goal of just under 2% considered best for the economy.
The ECB has lowered its benchmark rate that steers short-term market rates to a record low of zero, and has applied a negative interest rate of 0.4% on deposits it takes from banks, a way to encourage banks to lend the money rather than hoard it at the central bank.