European Central Bank plans to end stimulus
Risks, including U.K.’s exit without deal, slow economy
FRANKFURT— The European Central Bank said Thursday it is staying on course to wrap up its 2.5 trillion euro stimulus program at year end — even as risks from trade protectionism, Italian populist policies and a possible disorderly Brexit loom ever larger.
The central bank for the 19 countries that use the euro left its key interest rates and the end-date for its stimulus program unchanged at its meeting in Frankfurt, Germany.
President Mario Draghi said at a news conference that recent economic indicators suggested the eurozone economy was seeing somewhat weaker momentum from high levels last year.
“Is this enough of a change to make us change the baseline scenario?” he said. “The answer is no.”
The economy has slowed in the face of a range of risks: from the possibility that Britain might leave the European Union without an exit deal in March 2019, to increasing trade protectionism and Italy’s dispute with EU authorities over its spending plans.
Those factors, however, remain mostly risks for now — things that could damage the economy but haven’t actually happened yet, or not to such a degree that it would force the central bank to abandon its plans and prolong its support for the economy.
The ECB is sticking to its plan to end in December its stimulus program, under which it buys15 billion euros a month to lower borrowing rates and help the economy. It says it will keep interest rate benchmarks at record lows at least “through the summer” of 2019.
Draghi said it “would really take an extraordinary amount of lack of preparation” for Britain to fall out of the EU without a deal. Talks between the British government and the EU remain difficult and no final deal has been reached.
He warned that if there is no deal as Britain’s exit date approaches, companies will have to prepare on the assumption there will be no deal. That could lead to unease in financial markets, he said.
A no-deal Brexit could hurt trade between Britain and its largest business partner, the EU, and disrupt the movement of goods and parts for businesses. Meanwhile, Italy’s public spending plans could trigger a re-emergence of the Eurozone’s debt crisis — if bond investors start thinking the country is too risky. And a trade war between the U.S. and China could hurt global trade, dealing collateral damage to export-dependent Europe.
Draghi said he was confident an agreement will be found over Italy’s budget, which was rejected by the EU executive over the proposal to sharply in- crease the deficit.
He said failure to do so could “mean that households will have to pay more for borrowing, and so will banks.” He urged both sides to show “good common sense.”
By bringing the bond purchases to an end, the ECB is following the same path as the U.S. Federal Reserve in withdrawing stimulus deployed to overcome the persistent effects of the global financial crisis and Great Recession a decade ago.
Yet just as it seemed the coast was clear, with the European economy growing and unemployment falling, the new risks have appeared and growth has slowed, to a quarterly rate of 0.4 per cent in the second quarter, from 0.7 per cent at the end of last year.