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June 9, 2017

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Home » Business » Economy

ECB sticks with stimulus and low interest rates

Source: AP | 00:01 UTC+8 June 9, 2017 | Print Edition

THE European Central Bank made a small step toward phasing out its extraordinary support for the economy yesterday — but left its stimulus programs and record low interest rates unchanged despite a spreading recovery in the 19 countries that use the euro.

In its statement announcing its policy decision, the central bank dropped wording that it could lower interest rates further, a sign of greater confidence in the economy, which is growing at a two-year high.

The ECB did not otherwise change its views in its statement, and all eyes will turn to the news conference by its president, Mario Draghi, for further hints about future policy moves.

The central bank’s announcement kept important wording that its bond-buying stimulus program could be stepped up if the economic outlook worsens. While few expect that to happen, the words underline that the ECB is not yet willing to call time on the stimulus program.

Analysts expect that provision to be dropped as early as next month as the ECB edges toward announcing how it will phase out the bond purchases next year. The ECB is moving gingerly out of concern that investors could anticipate an end to the stimulus by sending market interest rates higher, tightening financing for firms and prematurely blunting the stimulus effect even before it ends.

Members of the ECB’s governing council expressed concern at the last meeting that “even small and incremental changes in communication could have strong signaling effects” and urging that the bank’s stance be adjusted “in a very gradual and cautious manner.”

Ending the bond purchases and raising interest rates could have wide-ranging effects, such as a stronger euro and higher interest costs for heavily indebted governments.

Draghi says weak inflation shows the recovery still needs support from the central bank. The higher growth in the economy, he says, is the result of central bank policies that need to continue for now.

The evidence is piling up that the growth in the eurozone has kicked into a higher gear and the region is recovering from the Great Recession and its crisis over high debt. The Eurostat statistics agency yesterday revised figures for first quarter growth upward to 0.6 percent from 0.5 percent previously.

Still, inflation is one of the weak points. The annual rate of 1.4 percent remains below the ECB’s goal of just under 2 percent considered consistent with a strong economy. In particular, core inflation, which excludes volatile prices for fuel and food, remains stuck at 0.9 percent.

The central bank has been buying 60 billion euros (US$67 billion) a month in government and corporate bonds, a step that pushes newly printed money into the economy in an effort to raise inflation. The bank has said it intends to keep the purchases going at least until the end of this year, and longer if needed. Many analysts expect the ECB to start tapering them early next year, in part because the ECB may start running out of eligible bonds to purchase.

The bank has kept its short-term benchmark rate that steers short-term rates at a record low of zero. It is also charging banks negative interest of 0.4 percent on excess cash parked at the ECB. That is in effect a tax aimed at pushing them to lend the money instead of hoard it.

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