Keen to end stimulus, ECB hails solid economic growth
FRANKFURT – European Central Bank chief Mario Draghi played down concerns over softness in the euro zone economy on Thursday as the ECB sought to bolster expectations for a gradual withdrawal of the ECB’s monetary stimulus.
Sources have told Reuters ECB policymakers were keen not to upset investor expectations that its 2.55 trillion-euro (2.2 trillion pounds) stimulus programme would end this year and its policy rate would rise for the first time since 2011 towards the middle of next year.
At a press conference after the meeting, Draghi argued that the 19-country currency bloc’s economy remained strong but acknowledged evidence of a “pull-back” from exceptional growth readings seen around the turn of the year.
“Overall, however, growth is expected to remain solid and broad-based,” he told a news conference after ECB policymakers held their meeting.
Weaker-than-expected economic data out of the euro zone has raised questions about the ECB’s policy path, but rate setters remained comfortable with the policy path priced in by investors, the sources said.
Rate setters spent most of Thursday’s meeting debating the uncertain economic outlook, but they agreed it wasn’t enough to warrant a change in the policy path, on which there is now broad consensus on the Governing Council, the sources said.
Draghi said risks related to the threat of protectionism had become “more prominent” but stressed the bank was confident that it was on the right track towards gradually weaning the economy off an unprecedented period of stimulus.
“The bottom line is … caution in reading these developments, caution tempered by an unchanged confidence in convergence of inflation to our inflation aim,” he said.
The ECB targets inflation of below but close to 2 percent and expects price growth to hover around 1.5 percent for the remainder of the year.
PRESERVING FIREPOWER
With the euro zone economy expanding for 20 straight quarters and millions of new jobs created, the main debate among policymakers is about how quickly to withdraw stimulus and preserve ECB firepower for the next downturn.
Business sentiment has already taken a hit, particularly in export-focused Germany, and a full-fledged trade war could quickly hurt growth — a risk already highlighted by policymakers at the ECB’s March meeting.
Draghi said a range of one-off factors including cold weather, labour strikes and the timing of the Easter holiday period had contributed to weakness seen in a number of read-outs across the euro zone in recent weeks.
With Thursday’s decision, the ECB’s bond purchases, aimed at stimulating growth and inflation through rock-bottom debt costs, will continue at 30 billion euros a month at least until the end of September, or beyond if needed to prop up inflation.
The deposit rate, currently the bank’s primary interest rate tool, will remain at -0.40 percent. The main refinancing rate will stay at 0.00 percent.
Economists polled by Reuters ahead of the meeting expected bond purchases to end this year after a short taper and to see the first rate increase in the second quarter of 2019. Some, however, have started to flag risks of a delay.
One worry is that protectionist rhetoric from the United States could push down the value of the dollar, an economic anomaly as the Federal Reserve is likely to raise interest rates several times this year, a natural support for its currency.
A stronger euro would cap inflation, a headache for the ECB. Inflation is already set to miss the target, the central bank’s sole policy objective, for years to come.
So far, however, the euro is up by just 1.1 percent against the dollar since the start of the year.
Source: reuters
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