European Central Bank hints at stimulus, but keep markets guessing
The European Central Bank held interest rates at record lows and kept the door open to more stimulus on Thursday but gave few hints about its next move, disappointing markets that had priced in a decisively dovish tone.
ECB President Mario Draghi said the ECB will study policy options to ensure it can pursue its unprecedented money-printing programme but did not hint at the anticipated extension of its asset purchases, maintaining the March end-date in an unexpectedly balanced message.
Facing anaemic growth and inflation, the ECB is buying 1.74 trillion euros worth of bonds, holding rates deep in negative territory and giving banks free loans, hoping to end the bloc’s nearly decade-long economic malaise with an infusion of cheap credit.
It has managed to prop up growth, but not enough, and even shaved some of its forecasts on Thursday, reinforcing market expectations that more monetary stimulus is just a matter of time.
“For the time being, the changes (in forecasts) are not substantial (enough) to warrant a decision to act,” Draghi told a news conference, adding that an extension of the ECB’s asset buys was not discussed.
The euro zone’s central bank kept its deposit rate at -0.4 per cent, charging banks for parking cash overnight, and held the main refinancing rate, which determines the cost of credit in the economy, unchanged at 0.00 per cent.
In the biggest clue about its next step, Draghi said the ECB had asked internal committees to look at various options to ensure the smooth running of asset buys. He had used similar language at the October 2015 meeting, which was followed by an easing package six weeks later.
This time the changes may be just technical but they are necessary preparatory work for any serious policy easing as the ECB is running out of assets to buy due to its self-imposed limits.
“This was a clear hint that the ECB will announce technical changes to its quantitative easing purchases at the October meeting, which is a prerequisite to any extension of QE beyond March 2017,” ING economist Carsten Brzeski said.
Euro zone bond yields rose, the euro hit a two-week high and stocks extended losses after Draghi said the extension of asset buys was not discussed.
“The disappointment is clearly there in the market, but the ECB did keep the door open to more stimulus,” said Kim Liu, senior fixed income strategist at ABN AMRO.
After 18 consecutive months of buying government bonds to pump up the economy and raise inflation, the ECB’s holdings hit a landmark 1 trillion euros last week -- yet prices are seen rising a mere 0.2 per cent this year, well below its target of just under 2 per cent.
Draghi also took pains to reassure markets that he would not hesitate to ease policy if the inflation outlook warranted it.
“I would say there is no question about, as I think I’ve said at other times, the will to act, the capacity to act and the ability to do so,” Draghi said. “If warranted, we will act by using all the instruments available within our mandate.”
Prolonging the purchases is controversial because it risks further distorting market prices and even that the stock of eligible bonds will run out. The ECB has already had to stop purchases in Estonia and found no bonds to buy in Luxembourg last month.
That has led to increasing speculation that it will have to adapt the rules of its asset purchase programme to provide even more stimulus, probably before year-end.
The choice is then between tweaking purchase rules or going for a bigger redesign although markets expect the bank to come up with a compromise.
“There was nothing in or between the lines which made us change our mind on what’s coming: We expect the ECB to announce the extension of the asset purchase programme by at least six months in December,” Nordea said.
The easiest options could include buying bonds yielding less than the bank’s -0.4 per cent deposit rate, extending the maturity range of eligible bonds to 30 years from 20 years and buying an even bigger portion of certain bond issues.
Bigger changes could involve the purchase of new types of assets, such as bank bonds, non-performing loans, or in the extreme case, stocks.
Still, each of these changes would generate concern or even outright opposition from hawks and the growing camp of moderates on the Governing Council, who worry about the unintended negative effects of the ECB’s extraordinary stimulus.
The ECB slightly upgraded its euro zone growth forecast to 1.7 per cent from 1.6 per cent this year, but downgraded it to 1.6 per cent from 1.7 per cent for both 2017 and 2018. Its forecast for a modest takeoff in inflation to 1.2 per cent next year and 1.6 per cent in 2018 were barely changed.
Draghi had his usual stern words for the structural reform efforts of the region’s governments, saying they needed to be “substantially stepped up” to raise productivity, improve the business environment, and boost infrastructure.
“Fiscal policies should also support the economic recovery,” he said, repeating a message given by central bankers at the annual Jackson Hole gathering this year but which has prompted little response so far in Europe. ($1 = 0.8891 euros)