European Union: ECB sticks with stimulus and low interest rates

THE European Central Bank made a small step toward phasing out its extraordinary support for the economy yesterday — but left its stimulus programs and record low interest rates unchanged despite a spreading recovery in the 19 nations that use the euro.

In its statement announcing its policy decision, the central bank dropped wording that it could lower interest rates further, a sign of better confidence in the economy, which is growing at a two-year high.

The ECB did not otherwise change its views in its statement, and all eyes will turn to the news conference by its president, Mario Draghi, for further hints about next policy moves.

The central bank’s announcement kept significant wording that its bond-buying stimulus program could be stepped up if the economic outlook worsens. While few expect that to happen, the words underline that the ECB is not from presently on willing to call time on the stimulus program.

Analysts expect that provision to be dropped as early as next month as the ECB edges toward announcing how it will phase out the bond purchases next year. The ECB is moving gingerly out of concern that investors could expect an end to the stimulus by sending market interest rates higher, tightening financing for firms and prematurely blunting the stimulus result even before it ends.

Members of the ECB’s governing council expressed concern at the last conference that “even small and incremental changes in communication could have strong signaling effects” and urging that the bank’s stance be adjusted “in a very gradual and cautious manner.”

Ending the bond purchases and raising interest rates could have wide-ranging effects, such as a stronger euro and higher interest costs for heavily indebted governments.

Draghi says weak inflation shows the recovery still needs support from the central bank. The higher increase in the economy, he says, is the result of central bank policies that need to continue for presently.

The evidence is piling up that the increase in the eurozone has kicked into a higher gear and the region is recovering from the Great Recession and its crisis over high deficit. The Eurostat statistics agency yesterday revised figures for initial quarter increase upward to 0.6 % from 0.5 % before.

Still, inflation is one of the weak points. The annual rate of 1.4 % remains below the ECB’s goal of just under 2 % considered consistent with a strong economy. In particular, core inflation, which excludes volatile prices for fuel and food, remains stuck at 0.9 %.

The central bank has been buying 60 billion euros (US$67 billion) a month in government and corporate bonds, a step that pushes newly printed money into the economy in an effort to raise inflation. The bank has said it intends to keep the purchases going at least until the end of this year, and longer if needed. A lot of analysts expect the ECB to start tapering them early next year, in part because the ECB may start running out of eligible bonds to purchase.

The bank has kept its short-term benchmark rate that steers short-term rates at a record low of zero. It is as well charging banks negative interest of 0.4 % on excess cash parked at the ECB. That is in result a tax aimed at pushing them to lend the money instead of hoard it.