ECB ends asset purchases amid rise in growth concerns
NEW ECONOMIC FORECASTS GLOOMIER ON GROWTH DUE TO TRADE, POLITICAL TENSIONS
The European Central Bank (ECB) decided yesterday to end its lavish asset purchase scheme but otherwise kept policy broadly unchanged, promising protracted stimulus for an economy struggling with an unexpected slowdown and political turmoil.
Having long flagged the end of quantitative easing, ECB had little choice but to stop bond buys. But it is likely to take its time before tightening policy any further given slower growth, a looming trade war, the prospect of a hard Brexit and budget tensions in Italy and France.
That all leaves ECB President Mario Draghi with a delicate balancing act: appearing confident enough to justify the end of the €2.6 trillion ($2.95 trillion or Dh10.83 trillion), four yearlong QE scheme, but sounding sufficiently concerned to keep cool investor expectations about further policy tightening.
Hoping to reassure markets, ECB repeated its promise that rates would be kept at their current record lows at least through next summer and that it would keep the time horizon for reinvesting cash from maturing bonds open-ended.
“The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP (asset purchase programmes) for an extended period of time past the date when it starts raising the key ECB interest rates,” ECB ■ said, tweaking its previous guidance that reinvestments would continue for an “extended period” after the end of bond buys.
With yesterday’s decision, ECB’s rate on bank overnight deposits, currently its primary interest rate tool, remains at -0.40 per cent, while the main refinancing rate, determining the cost of credit in the economy, remains at 0.00 per cent.
Attention turned to Draghi’s news conference, at which he was to present new economic projections, discuss the bank’s assessment of risks and its reinvestment policy.
Dimmer view
detail
ECB’s problem is that growth is weaker than policymakers thought even just weeks ago, while the predicted rise in underlying inflation has failed to materialise, putting in doubt some of the bank’s assumptions about the broader economy.
Overall inflation may be near the target now but falling oil prices suggest a dip in the months ahead and a solid rise ECB promised rates would be kept at current record lows through next summer and to keep the time horizon for reinvesting cash from maturing bonds open-ended. in wages is not feeding through to prices, leaving the bank with an unexplained disconnect.
Highlighting this complication, ECB is likely to cut growth and underlying inflation projections and may take a dimmer view on risks, all while Draghi argues growth is merely falling back to normal.
On the upside, Italy has taken steps towards a compromise in a budget impasse while the US and China are seeking to tone down trade tensions.