ECB shuts door on cutting rates and inflation will stay soft for years so pumping cash needed
The European Central Bank closed the door on more interest rate cuts on Thursday, judging the euro zone economy to be rebounding, but said inflation looks to remain weak for years so it still needs to pump out the cash.
The currency bloc has been on its best economic run since the global financial crisis nearly a decade ago with millions of jobs created since the ECB’s stimulus effort started. But inflation is barely moving upwards and growth may be stalling, putting the ECB into a difficult spot.
Acknowledging improved prospects, the ECB dropped a pledge to cut rates if necessary and gave up a long-standing reference to risks to the economy, declaring the outlook “balanced”.
Yet rate setters did not even discuss winding down the ECB’s 2.3 trillion euro (US$2.6 trillion) asset purchase scheme, kept rates below zero, and pledged very substantial accommodation.
The ECB also cut most of its inflation projections, even as it predicted better growth, suggesting that it has been overestimating the impact of rapid job creation on wages and ultimately prices.
“We consider that risks to the growth outlook are now broadly balanced,” ECB President Mario Draghi told a news conference in the Estonian capital of Tallinn.
He said the bank removed the language about potentially lowering interest rates because ultra-low inflation risks have gone.
“(But) if these risks were to reappear, we would certainly be ready to lower rates,” he said.
With Thursday’s decision, the ECB’s deposit rate, its key policy tool, remains at -0.4 per cent. Its monthly asset purchases will continue to total 60 billion euros a month and to run until at least December.
The euro hit a one-week low of US$1.11995, down around 0.4 per cent on the day, as Draghi spoke.
Playing down the significance of its new guidance and the forecast cuts, Draghi said the general path of inflation has not changed and rate cuts are not impossible, giving his message a dovish tilt.
“Nothing substantial has happened to inflation except the price of oil and the price of food ... underlying inflation has remained the same year to year,” he noted.
The next major test will come in September, when the bank will probably decide whether to continue bond buys beyond this year or start to wind them down, known as tapering.
“There is a growing risk that tapering is slower and takes longer than the market currently expects,” Cosimo Marasciulo, a bond manager at Pioneer Investments said.
The ECB said it now saw inflation this year at just 1.5 per cent, down from a previous forecast of 1.7 per cent and still short of its target of close to 2 per cent.
That would barely rise to 1.6 per cent in 2019, down from an earlier estimate of 1.7 per cent and further away from its official target of at or close to 2 per cent.
Economic growth this year was seen at 1.9 per cent versus an earlier 1.8 per cent forecast.
That came after the EU statistics agency Eurostat earlier revised up its estimate of first quarter growth to its fastest rate in two years, saying the economy of the 19-country euro zone expanded by 0.6 per cent quarter-on-quarter and by 1.9 per cent year-on-year.
The ECB’s nuanced stance was also motivated by the 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.
Any announcement on its quantitative easing (QE) programme is seen not coming until the autumn, when policymakers hope the economic picture will have become clearer.
German politicians in particular have called for an earlier end to QE, saying it is eroding the assets of savers and discourages other eurozone countries from pursuing reforms to make their economies more efficient. However Draghi said there were no visible divisions at the Governing Council’s meeting.
“I didn’t hear any dissenting voice ... with respect to the proposals,” he said.