LDN - Business

ECB keeps policy unchanged, staying on course to curb stimulus

[September 13, 2018] By Balazs Koranyi and Francesco Canepa

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 protectionist moves around the globe drag on growth.

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 protectionism to emerging market turbulence and Brexit will not be enough to derail a growth run now into its sixth year.

Making only a nuanced tweak to its policy stance, 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. Some analysts say the unusually long horizon for that policy guidance will leave the bank on auto pilot for months.

Attention now turns to ECB President Mario Draghi's 1230 GMT news conference, during which he will detail new growth and inflation projections and face questions about growing risks to the outlook. He may also discuss how the ECB will reinvest cash from debt maturing as part of its 2.6 trillion euro bond purchase program.

But even as economists are focusing on risks, Draghi is likely to emphasize that expansion is solid enough to absorb spare capacity and thus generate inflation, even if it could still take years to push consumer price growth back to the bank's near 2 percent target.

He is also likely to argue that wage growth is improving, further supporting the bank's expectation that inflation will slowly but surely rise towards the target.

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

While the scheme has appeared to work, inflation is rising more slowly than earlier hoped and much of the ECB's firepower is exhausted, leaving it with few tools to fight the next downturn.

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The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach/File Photo

OPTIMISM?

Despite Draghi's optimism on growth, the bank is likely to cut some of its forecasts after a string of weak figures over the summer, according to a Reuters poll of economists. Even leading indicators suggest that growth will at best level off rather than rebound after a weak start to the year.

Draghi will also face questions about fiscal prudence in Italy, where a populist government is contemplating whether to challenge European Union spending rules. Such a risk from one of the bloc's weakest members has kept bond markets volatile, raising the risk of persistent turbulence.

New growth forecasts are likely to be only a touch lower than the June projections, however, and inflation expectations are seen broadly stable, supported by higher energy costs and slowly building wage pressures.

Draghi may also provide further detail on how the ECB will reinvest funds from maturing debt, though sources close to the discussion said these decisions will not have a meaningful impact on policy as they will be mostly technical moves to ensure a smooth process.

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

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)

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