European Central Bank sticks to plan to end stimulus

The central bank for the 19 countries that use the euro left its key interest rates and the end-date for its stimulus program unchanged at its meeting in Frankfurt, Germany.

26 October 2018 | 16:49

Source: Associated Press

  • Source: Associated Press
  • Last update: 26 October 2018 | 16:49

The President of European Central Bank Mario Draghi waits for the beginning of a press conference following the meeting of the governing council in Frankfurt, Germany, Thursday, Oct. 25, 2018. (AP Photo/Michael Probst)

FRANKFURT, Germany: The European Central Bank said Thursday it is staying on course to wrap up its 2.5 trillion euro ($2.85 trillion) stimulus program at year end — even as risks from trade protectionism, Italian populist policies and a possible disorderly Brexit loom ever larger.

The central bank for the 19 countries that use the euro left its key interest rates and the end-date for its stimulus program unchanged at its meeting in Frankfurt, Germany.

President Mario Draghi said at a news conference that recent economic indicators suggested the eurozone economy was seeing somewhat weaker momentum from high levels last year.

“Is this enough of a change to make us change the baseline scenario?” he said. “The answer is no.”

The economy has slowed in the face of a range of risks: from the possibility that Britain might leave the European Union without an exit deal in March 2019, to increasing trade protectionism and Italy’s dispute with EU authorities over its spending plans.

Those factors, however, remain mostly risks for now — things that could damage the economy but haven’t actually happened yet, or not to such a degree that it would force the central bank to abandon its plans and prolong its support for the economy.

The ECB is sticking to its plan to end in December its stimulus program, under which it buys 15 billion euros a month to lower borrowing rates and help the economy. It says it will keep interest rate benchmarks at record lows at least “through the summer” of 2019.

Draghi said it “would really take an extraordinary amount of lack of preparation” for Britain to fall out of the EU without a deal. Talks between the British government and the EU remain difficult and no final deal has been reached.

He warned that if there is no deal as Britain’s exit date approaches, companies will have to prepare on the assumption there will be no deal. That could lead to unease in financial markets, he said.

A no-deal Brexit could hurt trade between Britain and its largest business partner, the EU, and disrupt the movement of goods and parts for businesses.

Meanwhile, Italy’s public spending plans could trigger a re-emergence of the eurozone’s debt crisis — if bond investors start thinking the country is too risky. And a trade war between the U.S. and China could hurt global trade, dealing collateral damage to export-dependent Europe.

Draghi said he was confident an agreement will be found over Italy’s budget, which was rejected by the EU executive over the proposal to sharply increase the deficit.

He said failure to do so could “mean that households will have to pay more for borrowing, and so will banks.” He urged both sides to show “good common sense.”

By bringing the bond purchases to an end, the ECB is following the same path as the U.S. Federal Reserve in withdrawing stimulus deployed to overcome the persistent effects of the global financial crisis and Great Recession a decade ago.

Yet just as it seemed the coast was clear, with the European economy growing and unemployment falling, the new risks have appeared and growth has slowed, to a quarterly rate of 0.4 percent in the second quarter, from 0.7 percent at the end of last year.

And while headline inflation has hit 2.1 percent, the underlying rate that excludes volatile items like fuel and food remains much lower at 0.9 percent. The ECB says it is confident the headline inflation rate will remain sustainably near its goal of just under 2 percent.

Even as it phases out the bond purchases, the bank is continuing other means of support for the economy, meaning monetary policy remains loose and interest rates should remain low. The ECB has said it will keep buying new bonds as the old ones it has bought are paid off, maintaining the equivalent level of stimulus by keeping borrowing rates down.

Meanwhile, it has made clear it will keep its key interest rates at current ultra-low levels until “at least through the summer of 2019.” Right now, the central bank’s benchmark for lending to banks that need ready cash is zero and the rate for deposits it takes from banks that have excess money is minus 0.4 percent. That negative rate aims to pushing banks to lend the money, not let it pile up.

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