LDN - Business

ECB keeps money taps open but drops reference to rate cuts

[June 08, 2017] By David Mardiste and Francesco Canepa

TALLINN/FRANKFURT (Reuters) - The European Central Bank kept its money taps wide open on Thursday but dropped a reference to possible interest rate cuts, an unexpectedly hawkish move as euro zone growth accelerates.

The currency bloc's economy has been on its best run since the global financial crisis nearly a decade ago but the ECB was expected to take a more cautious stance as the inflation rebound has yet to show a convincing upward trend.

"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the bank said, removing a long-standing reference to lower rates.

It kept its easy money policy unchanged as widely expected, however, including its 2.3 trillion euro ($2.59 trillion) bond-buying program and sub-zero interest rates, despite resistance from cash-rich Germany.

ECB President Mario Draghi holds a news conference in Tallinn at 1230 GMT (8:30 a.m. ET), in which he will give updated staff economic forecasts and is likely to acknowledge the euro zone's broadening and accelerating growth performance.

Sources have told Reuters the ECB is likely to nudge up its growth forecasts but trim some of its inflation projections, indicating that its stimulus is working but remains needed.

That mixed outlook had been expected to underpin the case for keeping the ECB's easy policy in place, including the commitment to cut rates further if necessary.

The ECB also maintained its pledge to increase its asset purchases if necessary.

Draghi is also expected to declare risks to growth "balanced", giving up a long-established more pessimistic stance, a move that is seen as a nuanced but definite step towards policy normalization after years of stimulus.

The euro <EUR=> was trading broadly unchanged against the dollar, not far from a seven-month high of $1.1285 hit earlier this month. [FRX/]

With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at -0.4 percent. Its monthly asset purchases will continue to total 60 billion euros a month and to run until at least December.

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Flags in front of the European Central Bank (ECB) before a news conference at the ECB headquarters in Frankfurt, Germany, April 27, 2017. REUTERS/Kai Pfaffenbach/File Photo

CAUTIOUS

Among other factors making the ECB cautious are big debts overhanging governments and companies, the piles of unpaid loans weighing on banks in countries like Italy and Portugal, and political uncertainty ahead of elections in Germany and Italy.

But any announcement on its quantitative easing (QE) program is likely to be put off until the autumn, when policymakers hope the economic picture will have become clearer. Asset purchases under the program are due to continue at least until December at a pace of 60 billion euros per month.

"We still expect a compromise to be reached, implying more QE into next year, but at a reduced monthly pace," economists at Societe Generale said in a note before the rate decision.

"While data-dependent, we also expect further quarterly 10 billion euro reductions, ending QE in September 2018."

Draghi is also certain to face questions about failing Spanish lender Banco Popular <POP.MC>, which was bought by rival Santander <SAN.MC> on Wednesday in an ECB-orchestrated rescue.

Investors were wondering if the ECB move on Popular would have implications for two struggling banks in Italy's Veneto region, which like Popular are weighed down by bad loans.

Hours after the Popular's rescue, sources have told Reuters Italian banks are considering assisting in a rescue of Popolare di Vicenza and Veneto Banca by pumping 1.2 billion euros of private capital into the two regional banks.

(Writing by Balazs Koranyi; Editing by Catherine Evans)

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