ECB readies to outline stimulus future, possibly in October
FRANKFURT, Germany (AP) - The European Central Bank could decide on changes to its stimulus measures next month, its president Mario Draghi said Thursday, in a statement that's stoked speculation in the markets that the bank is getting ready to rein in its crisis-era efforts.
At a press conference after the bank's 25-member governing council decided to leave its interest rates and bond-buying program unchanged, Draghi said the ECB will soon decide on the "calibration" of its policy instruments beyond 2017 in the autumn.
"We will announce when we are ready," said Draghi. "We think we are going to be ready for much of what we have to decide in October ... if we are not then we postpone."
In the markets, traders took Draghi's statement as a hint that the bank may outline a strategy on reducing its monthly asset purchases at its meeting in October. The euro was up 1 percent at $1.2039, its highest level since early 2015.
Strong economic growth in the eurozone has ratcheted up expectations that the bank, which sets interest rates for the 19 countries that use the euro, will soon start to phase out its stimulus, which currently involves it buying 60 billion euros ($72 billion) of bonds in the markets in order to keep interest rates low and get inflation up to its goal of just under 2 percent.
However, Draghi said a "very substantial degree of accommodation" was still needed for underlying inflation pressures to build up and support headline inflation. Draghi has been reluctant to spell out the timing and pace of the withdrawal for fear of sending the euro and market interest rates higher ahead of the fact. That kind of market reaction would blunt the impact of the stimulus before it has run its full course.
On the euro, Draghi said the recent exchange rate volatility, which has seen the euro rally about 15 percent this year to breach the $1.20 mark for the first time in two and a half years "requires monitoring" and is a source of "uncertainty." A stronger euro can hurt eurozone exports and lower inflation which the ECB is trying to raise through its 60 billion euros ($72 billion) per month in bond purchases.
Though not a policy target, Draghi said it is "very important" for the medium term outlook for inflation
The euro's strength appears to be largely behind lower inflation projections from the bank. It now expects inflation to be 1.2 percent next year against 1.3 percent previously and to be 1.5 percent in 2019 from 1.6 percent. However, it raised its economic growth forecast this year to 2.2 percent, which would be a ten-year high, from 1.9 percent previously.
An end to the stimulus would have wide-reaching effects on markets, companies, governments and consumers. Long-term interest rates would rise for borrowers such as governments, leaving less for spending on other things, and for people with house mortgages. Savers might see appreciable returns on their holdings, currently scanty due to the zero-interest rate policy. Higher rates could mean trouble for so-called "zombie" companies that would no longer be profitable if they had to pay more normal rates for credit; their departure from the economy through bankruptcy, however, could free resources for more productive uses.
The bond purchases have pumped newly printed money into the banking system, lowering long-term interest rates and making credit more easily available. The hope is to spur inflation from what were considered dangerously low levels. Low inflation had raised concerns it could turn into a chronic downward spiral of wages and prices that would kill off growth and investment. Draghi has said that danger is now over, thanks to the stimulus.
The bond purchases are currently set to run at 60 billion euros ($72 billion) per month through the end of the year, and longer if needed to raise inflation from the current 1.5 percent toward the bank's goal of just under 2 percent.
The ECB left its benchmark short-term interest rate at zero, and its deposit rate at negative 0.4 percent, both record lows.