FRANKFURT: The European Central Bank stuck to its pledge to keep money pouring into the euro zone economy for as long as needed, despite opposition from some rate setters and increased growth and inflation forecasts for the area. The ECB raised its euro zone growth forecasts from this year through to 2019 and nudged up its expectations for inflation, now seen at 1.7 per cent in 2020, close to its target of almost 2 per cent.
But it kept its interest rates at rock bottom and also held rigidly to its script on what it plans for next year in asset purchases. Pressure from some policymakers to signal a possible change of plan was easily rebuffed, sources close to the matter said.
“All in all the revision of the macroeconomic projections is going in the right direction,” ECB President Mario Draghi (pictured inset) told a news conference. “(But) an ample degree of monetary stimulus remains necessary.”
Better-than-expected growth and, to a lesser extent, inflation are giving fresh ammunition to critics of the ECB’s 2.55 trillion euro ($3 trillion) bond-buying programme, such as Dutch central bank governor Klaas Knot.
Indeed, two central bank sources said that a minority of ECB rate-setters at Thursday’s meeting wanted to signal that the ECB may change its easy-money pledge if euro zone inflation keeps accelerating.
Their suggestions included dropping a pledge to continue to buy bonds until inflation converges to the ECB’s target or the option to increase purchases if the outlook worsens.
“Some people wanted to say that if inflation continues to increase, we will be forced to change the forward guidance perhaps,” one of the sources said.
But these hawks were outnumbered as most rate-setters opted to simply repeat the ECB’s plan to keep buying bonds at least until September and to keep rates at record lows well after that, the sources said, adding the debate was not heated.
Draghi said there was no discussion of the quantitative easing asset-buying scheme and Knot’s recently expressed view that the scheme had “simply run its course” was not shared by the majority.
In a nuanced message, Draghi nonetheless added that he was more confident that the inflation target could be reached and said he saw no negative effect from tightening by the US Federal Reserve, which announced its third rate hike of 2017 on Wednesday.
“It’s quite early before we talk about change in our monetary policy support,” Draghi told a news conference. “Though in the presence of an expansion which is gaining momentum, our confidence towards this objective is increasing and is certainly greater than it was at the last monetary policy meeting.”
Having faced five years of anaemic price pressures, the ECB has deployed its entire policy arsenal, cutting rates into negative territory, giving banks cheap loans and soaking up bonds with an unprecedented 2.55 trillion euros ($3 trillion) of purchases.
Its work has paid off as the euro zone recovery is now well into its fifth year thanks to nine million new jobs, letting policymakers curb stimulus from next year and raising the prospect that the lavish bond buys it started in early 2015 could finally end.
But Draghi’s words left the market in no doubt the ECB was in no rush to curb stimulus.
“Remember the metaphor of the euro zone being the patient on intensive care?,” ING economist Carsten Brzeski said. Today, Draghi once again made clear that… only once the patient is able to sprint an entire marathon will the crutches come off.”