STILL STIMULATING

Storm clouds gather on economic horizon

The European Central Bank upholds massive support to the euro zone as clouds gather.

FRANKFURT: The European Central Bank upheld its massive support to the euro zone yesterday, avoiding rocking the boat as storm clouds gather on the economic horizon.

The Frankfurt institution kept its main refinancing rate at zero, the rate on the marginal lending facility at 0.25%, and on deposits at -0.4%, meaning banks pay to park money with the ECB.

Governors also decided to continue buying €30 billion ($36.5 billion) of government and corporate bonds per month under the “quantitative easing” (QE) stimulus programme.

Analysts had widely expected caution from the ECB after it ventured a burst of optimism in March, dropping a pledge to increase QE if the economy weakened again in a move policymakers said was backed by positive data.

Since governors last met, a slew of economic data has signalled that the single currency area got off to a rocky start this year after a robust 2017, complicating the ECB’s efforts to gradually exit its crisis-era stimulus measures.

ECB president Mario Draghi warned of “some moderation” in the euro zone’s growth pace, after a string of hard and soft data suggested the region’s economy lost momentum at the start of the year.

“Following several quarters of higher than expected growth, incoming information since our meeting in early March points towards some moderation while remaining consistent with a solid and broad based expansion of the euro area economy,” he told reporters.

Concerns about protectionist threats, geopolitical risks and global trade tensions have added to doubts about the strength of the euro zone recovery.

US President Donald Trump’s threats of tens of billions of dollars of border levies on Chinese imports and Beijing’s warning of a response in kind could also throw the world economy off track.

Even without such shocks, the ECB has long fallen short of its central price stability objective: inflation of just below 2.0%.

Price growth stood at 1.3% in March, and central bank forecasts call for it to reach just 1.7% by 2020.

“But despite slow progress and shades of gloom, the ECB must continue to hint at an announcement (of further policy changes) in June or July, to continue anchoring expectations of a normalisation away from QE,’’ said analyst Louis Harreau of Credit Agricole.

Lower interest rates and QE are designed to pump cash through the financial system and into lending to firms and households — powering economic growth and inflation.

But after a near-euphoric second half of 2017 lifted annual growth to its highest level since 2007 — an expansion of 2.3% across the euro zone’s 19 nations — there are hints fewer positive surprises may be in store this year.

A key survey of euro zone business activity, the purchasing managers’ index, was unchanged in April at 55.2, data company IHS Markit said on Monday.

The index has joined other indicators in losing some of the exuberance seen around the turn of the year, although the reading was above the 50-point mark that suggests economic expansion.

“The economy has shifted down a gear at the start of this year,” Commerzbank AG analyst Christoph Weil commented, but “there is no need to fear a massive plunge in economic growth”.

Both the ECB and the Washingtonbased International Monetary Fund have lifted their growth predictions for the euro zone to 2.4% in 2018.

As the central bank approaches technical limits to its bond-buying, it has little choice but to hope such forecasts come true as it tiptoes on a path out of QE.