ECB sticks to massive
stimulus ahead of high-risk votes
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[March 09, 2017]
By Francesco Canepa and Balazs Koranyi
FRANKFURT
(Reuters) - The European Central Bank pledged on Thursday to keep its
aggressive stimulus policy at least until the end of the year,
maintaining its support for the economy as anti-euro sentiment rises
before elections in France and the Netherlands.
While expected, the decision showed the ECB's leadership was resisting
calls from Germany to start winding down its 2.3 trillion euro ($2.43
trillion) bond-buying scheme, or at least signal its intention to do so,
as growth and inflation rebound.
Instead, the Frankfurt-based central bank stuck to its plan of
continuing the purchases -- which began two years ago -- until December.
It pledged to keep interest rates at current, record-low levels until
long after that, or even cut them if necessary.
"If the outlook becomes less favorable, or if financial conditions
become inconsistent with further progress towards a sustained adjustment
in the path of inflation, the Governing Council stands ready to increase
the program in terms of size and/or duration," the ECB said in a
statement.
At a press conference due to start at 1330 GMT, ECB President Mario
Draghi was expected to acknowledge that the outlook for the euro zone
economy had improved but also point to political risks and a still
fragile recovery.
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The ECB is scheduled to cut the pace of its bond purchases by a quarter
from next month but continue them at least until year-end, or longer if
it thinks it has not yet reached its medium-term inflation target of
almost 2 percent.
But nearly a decade after the 19-country currency bloc's economic woes
began, it is looking in better shape.
Economic sentiment is at a six-year high, trade is rebounding, services
and manufacturing output is rising, and unemployment is at its lowest
since 2009.
Even inflation, the ECB's key objective, has rebounded, essentially
hitting its target last month.
In this context, Germany's central bank governor Jens Weidmann and ECB
director Yves Mersch have both made the case for ruling out further rate
cuts.
And German Finance Minister Wolfgang Schaeuble said on Thursday he was
in favor of a "timely start to the exit" from the ECB's loose monetary
policy, echoing calls from the German banking association and the Ifo
economic institute.
That leaves Draghi walking a tightrope, as improvements on the economic
front are at risk of being derailed by hazards including the Dutch and
French elections and global economic governance under new U.S. President
Donald Trump.
Economists in a Reuters poll said the ECB's next move will be either a
tweak of its guidance in the second half of this year or a gradual
reduction in its asset-buying next year.
History may counsel caution. The ECB's most recent rate hikes, in 2007/8
and in 2011, both had to be rapidly reversed as economic conditions
worsened.
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![](../images/030917pics/busine57.jpg)
European Central Bank (ECB) headquarters in Frankfurt, Germany, July
29, 2016. REUTERS/Ralph Orlowski
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"An
important reason for not taking any hasty action is the ECB's own track record
of jumping the gun," ING economist Carsten Brzeski said.
Still, the bank's deliberations may be heated, particularly because new
inflation forecasts are likely to show an increase, partly due to a rebound in
the price of oil.
At most the ECB may drop its reference to downside economic risks and let an
ultra-cheap borrowing facility for banks expire as scheduled.
It may also debate but probably reject calls to give up a reference to lowering
rates or buying more bonds if necessary.
FRANCE
Although Draghi may be reluctant to admit it, the French election is likely to
be a particular concern. With far-right candidate Marine Le Pen wanting to take
France out of the euro zone, markets are already bracing for a shock.
The cost of insuring French government debt against default has doubled since
the start of the year <FRGV5YUSAC=MG> while the yield differential between
five-year French and safe-haven German bonds rose to its highest since 2013 last
month.
Investor nerves are also affecting debt of periphery countries such as Italy and
Portugal even though the ECB's main indicator of stress in the financial system
is trending downwards.
Next weekend's G20 meeting in the German town of Baden-Baden, the first since
Trump took office, may further complicate the policy picture.
An early draft of the communique suggests the world's top finance ministers and
central bankers may no longer explicitly reject protectionism or competitive
currency devaluations. Under Trump, the United States has accused some trade
partners, particularly Germany, of exploiting a weak currency.
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Nevertheless, policymakers have so far suggested that the ECB is likely to begin
discussing its next policy move only in June, with the first actual move perhaps
not coming until after German elections in September.
"Our economists' baseline being that such a move is still six months away, with
the possibility of an earlier announcement in June," Deutsche Bank strategist
Jim Reid said.
(Editing by Catherine Evans)
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