European Central Bank keeps door open for more stimulus

AP News
Posted: Oct 20, 2016 11:38 AM
European Central Bank keeps door open for more stimulus

FRANKFURT, Germany (AP) — European Central Bank head Mario Draghi has left open the possibility that the bank might extend its stimulus program of 80 billion euros in monthly bond purchases beyond its earliest end date in March. He made no promises, however, other than to say there would be no abrupt stop.

He indicated Thursday that a decision about the future of the stimulus program, which aims to push up weak inflation and growth by lowering borrowing rates, would only come at the bank's Dec. 8 meeting.

"An abrupt end to the bond purchases? I think it's unlikely," Draghi said at a news conference. "Our decisions in December will tell you what we are going to do in the coming months."

He spoke after the central bank's governing council made no changes to any of its record low interest rates or other stimulus programs, at a meeting that has been widely seen as a prelude to the next one. The bank will then have new projections for inflation and growth on which to base a decision.

Markets have been scrutinizing every word the bank lets drop about the bond-buying program, which has driven bond prices up and longer-term interest rates down — in many cases below zero.

Its aim is to increase inflation from a current worrisome low annual rate of 0.4 percent toward the bank's goal of just under 2 percent, which is considered consistent with a strong economy. Beyond that, it is trying to support a modest economic recovery and lower unemployment of 10.1 percent.

The end date has been left deliberately fuzzy; the purchases will run through March, "or in any case" until inflation turns convincingly upward.

Many analysts think the ECB will extend the bond-buying program for at least six months beyond March. Draghi on Thursday only indicated that whenever it ends, it would be phased out in some manner, likely through a gradual reduction in purchases, or tapering.

Halting the program earlier rather than later would likely send bond yields higher, working against the central bank's efforts to help the economy.

"Probably the most important point to be made is that Mr. Draghi (and, of course, the council) wanted to keep all options open ahead of the December meeting and therefore refrained from discussing anything that could have had an untoward market impact beforehand," wrote Simon Derrick, chief markets strategist at BNY Mellon in a research note to investors.

One key question unnerving markets is whether the ECB will eventually run out of bonds to buy, and have to end the stimulus before it wants to. Draghi said that the governing council heard reports from staff committees on how to get around scarcity in different bond markets but offered no detail.

They say the bank may have to tweak its self-imposed limits on what bonds it can purchase. It currently limits the amount from any one issuer, and is purchasing government bonds in proportion to euro member countries' share of the currency union's economy. Departing from that rule, however, could lead to charges of political favoritism.

Draghi said the bank "is committed to preserving the very substantial degree of monetary accommodation" but that elected governments must help as well by cutting red tape and making their economies more business-friendly.

The ECB's other stimulus measures have included cutting to zero its benchmark refinancing rate, which means banks can borrow from it interest-free, offering unlimited cheap loans to banks, and cutting the rate on deposits banks leave with it overnight to minus 0.4 percent. That negative rate is in effect a tax intended to push banks to lend excess funds, not hoard them at the central bank.

What the ECB does over the coming months will hinge on economic developments, many of which the bank can do little about, such as the scale of the slowdown in China, the outlook for oil prices and the impact of Britain's exit from the European Union.

Draghi conceded that risks to the eurozone's economic growth remain "tilted to downside" and that those risks were largely related to the "external environment." Figures due to be released at the end of this month are expected to show that the eurozone economy grew at a tepid rate in the third-quarter.