- Policy, guidance left unchanged
- No decision on tapering seen on Thursday
- Inflation forecasts likely to be trimmed
- Growth projections seen raised slightly
The European Central Bank reaffirmed its ultra-easy policy stance on Thursday, even keeping the door open to increase bond purchases, dashing hopes it would formally signal its intent to claw back stimulus from next year.
The ECB kept rates at their record lows, confirmed that asset buys would continue at 60 billion euros ($71.76 billion) per month at least until December and said it could even increase or expand the asset purchases if needed, sticking with its long-held super easy stance.
The statement is likely to rattle some investors who expected the ECB to start laying the groundwork for a cut in monetary stimulus because growth is robust, the threat of deflation long gone and unemployment falling fast — all supporting the case for removing at least some of the bank’s extraordinary measures.
Investor attention now turns to ECB President Mario Draghi’s 1230 GMT news conference, during which he may still offer at least some clues to the evolution of the bank’s view on stimulus and will also detail new economic projections.
“If the outlook becomes less favorable…the Governing Council stands ready to increase the program in terms of size and/or duration,” the ECB said in a statement.
The euro remained roughly 0.5 percent higher against the dollar after the ECB’s decision.
The key dilemma for Draghi in deciding whether to continue or wind down the asset purchases is that while growth is robust, inflation will remain under the ECB’s target of almost 2 percent for years to come given a sizable slack in the labor market and the absence of meaningful wage growth.
Designed to cut borrowing costs, boost demand and raise inflation, the ECB’s 2.3 trillion asset purchase scheme has run for 2-1/2 years, successfully countering the threat of deflation but boosting consumer prices by less than it had hoped.
Though the ECB has preferred to tailor its message by the smallest of increments, time is running out for a decision as the scheme is due to end in December, requiring a decision at the Oct. 26 or Dec. 14 rate meetings.
Hawkish rate setters led by Germany argue that the scheme has reached its potential so it should be wound down. But “doves” say that a rapid exit could tighten financial conditions too much, undoing the program’s successes.
Part of the caution may be related to the euro’s 13 percent gain against the dollar this year.
While the rally in great part reflects the euro zone’s solid economic run, it exacerbates the ECB’s inflation problem by putting a natural lid on import costs and consumer prices.
The ECB is expected to lift its growth projections on Thursday but cut the inflation outlook, indicating that price growth will miss its target at least through 2019 after already falling short for more than four years.
Analysts polled by Reuters predicted no policy change on Thursday and expect bond buys to be cut by one-third in a decision later this year.
At the news conference, the main question is whether Draghi will signal a policy shift that is now essentially expected by all investors. He is also certain to face questions about the firming euro.
Draghi is seen as certain to ask the ECB’s committees to prepare policy options for the coming meetings, a signal that has in the past preceded actions.
But policymakers’ hands are increasingly tied as the asset buys are slowly running up against the ECB’s self-imposed rules.
Abandoning the rules would be legally difficult while including new assets in the scheme would risk sending the wrong signal, some economists argue.