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ECB stays on course to curb stimulus even as growth risks rise
The Saigon Times Daily
Friday,  Sep 14, 2018,09:03 (GMT+7)

ECB stays on course to curb stimulus even as growth risks rise

The Saigon Times Daily

European Central Bank (ECB) President Mario Draghi attends the news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, September 13, 2018 – PHOTO: REUTERS

FRANKFURT (REUTERS) - The European Central Bank kept policy unchanged as expected on Thursday, staying on track to end bond purchases this year and raise interest rates next autumn, even as it warned that risks from protectionism were gaining prominence.

With inflation rebounding and growth leveling off at a relatively healthy pace, the ECB has been gently removing stimulus for months in the belief that a range of risks from trade disputes to emerging market turbulence and Brexit will not be enough to derail an economic expansion now in its sixth year.

Making only nuanced tweaks in its policy statement, ECB President Mario Draghi focused on healthy domestic fundamentals, including rapid growth in employment and a rise in wages, which are expected to push inflation higher, even if only slowly.

In a subtle shift, the ECB said it would halve its monthly bond purchases to 15 billion euros from October, firming up its previous language, which said only that such a move was anticipated.

But it maintained its stance that bond buys are expected to end by the close of the year and that interest rates will stay unchanged at least through next summer.

While this is seen as an unusually long guidance period for a central bank, it has been uncontroversial and is fully priced in by financial markets.

“The ECB looks set to stick to the current autopilot,” ING economist Carsten Brzeski said. “The ECB now only has to deliver. There is no need for new hints or premature announcements.”

The ECB has kept interest rates in negative territory for years and bought more than 2.5 trillion euros of debt, depressing borrowing costs and driving up growth following a double-dip recession that nearly tore the 19-member currency bloc apart.

Risk downplayed?

Draghi nevertheless acknowledged that risks from emerging markets, such as China, Turkey and Argentina, were rising and said trade tensions were also concerning.

“Uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently,” Draghi said during his press conference.

Partly reflecting those risks, the ECB cut its growth projection by 0.1% for the next two years. Draghi argued that growth would slowly ease as stimulus waned and growth returned to its natural state.

He added that major central banks curbing their support was also a source of risk as policy normalization could increase market volatility.

“The major source of uncertainty that we see in global output comes from the rise in protectionism,” Draghi said, adding that projections only reflect implemented measures, not threats or announcements.

In another ominous sign, the ECB also cut its underlying inflation forecasts for next year and 2020, while maintaining its overall price growth forecast, suggesting that fundamental price pressures are not building as fast as it had hoped.

For markets, the policy meeting proved largely uneventful. Although the euro gained half a percent against the dollar, most of this was due to lower than projected U.S. inflation figures.

The Bank now expects the euro zone economy to grow 2.0% this year and 1.8% next, slightly lower than its previous forecast of 2.1% and 1.9%.

The ECB maintained its forecast of annual inflation at 1.7% through to 2020, with Draghi insisting that was consistent with the bank’s target of near 2%.

With Thursday’s decision, the ECB’s deposit rate, currently its primary interest rate tool, will remain at -0.40% while the main refinancing rate, which determines the cost of credit in the economy, will remain at zero.

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