LDN - Business

ECB drops easing bias, taking baby step toward stimulus exit

[March 08, 2018] By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank dropped a long-standing pledge on Thursday to increase bond buys if needed, taking another small step in weaning the euro zone economy off protracted stimulus.

Keeping its broader policy unchanged, the ECB said it could still extend its 2.55 trillion euro ($3.16 trillion) bond purchase scheme beyond September if needed but omitted a reference to bigger purchases, a signal that it remains on track to end a three-year-old stimulus scheme before the end of 2018.

Having revived euro zone growth with lavish stimulus, the ECB has been dialing back support in tiny increments, fearing any big change could unravel its work and force an embarrassing and economically damaging policy reversal.

"The net asset purchases, at the current monthly pace of 30 billion euros, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim, the ECB said in a statement after its regular policy meeting.

Dropping this so-called easing bias is largely symbolic as few if any expected bigger bond buys but the move was still seen as a precursor to a broader revision of the bank's policy guidance, a move flagged in earlier meetings.

It will come as a surprise to some, though, as economists were split before the meeting on when the ECB would take this step.

Investor attention now turns to ECB President Mario Draghi's 1330 GMT news conference, at which he will unveil a quarterly update of economic projections, a key input into policy decisions. He is also expected to reveal whether the bank has already started work on revisions to its guidance, a discussion the bank has said is likely to start in "early" 2018.

The new guidance is expected to remove a singular focus on asset buys in lifting inflation and would spread the emphasis to a broader set of instruments, including interest rates.

DICHOTOMY

The dichotomy facing the ECB is that while growth has blown past expectations, inflation remains weak, having hit a 14-month low in February and staying well short of its target of almost 2 percent, the bank's sole mandate.

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The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, December 7, 2017. REUTERS/Ralph Orlowski/File Photo

While the bloc's five-year growth run and a rapid drop in unemployment suggest that inflation will eventually rise, its rebound is still months away, complicated by the euro's rise against the dollar, which puts a lid on price growth.

Launched three years ago amid fears of deflation, the ECB's quantitative easing scheme depressed borrowing costs and induced firms to borrow and invest, all with the aim of generating inflation.

While the threat of deflation is long gone, the euro's volatility threatens to derail the bank's efforts.

The single currency extended its gains after the decision to trade at $1.2419, a touch below a three-year high hit last month.

Risks of a trade war with the United States, an inconclusive election in Italy and falling bank share prices are all expected to add to the caution.

New economic projections are also not likely to justify a bigger policy shift in the near term since they are expected to confirm earlier expectations, pointing to an eventual rise in inflation but still indicating a lack of convincing underlying price pressures.

Indeed, economists polled by Reuters expect bond buys to conclude at the end of this year while a first rate hike is expected only in the second quarter of 2019.

With Thursday's policy decision, the ECB's benchmark deposit rate will stay at minus 0.4 percent and the main refinancing rate, the main policy benchmark during normal times, at 0.00. Asset buys are set to continue at 30 billion euros per month.

(Additional reporting by Tom Sims; Editing by Catherine Evans)

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