The European Central Bank left its ultra easy monetary policy stance unchanged as expected on Thursday, keeping rates at record lows and even leaving the door open to more asset buys if the outlook worsens.
Having raised the prospect of policy tightening last month, Thursday’s inaction was likely to signal that any policy tweaks would come only slowly and gradually, likely taking years to wean the European economy off monetary support.
Still, with the euro zone economy now growing for the 17th straight quarter, its best run since before the global financial crisis, the ECB can at least contemplate easing off the accelerator, preserving some its remaining firepower after printing nearly €2 trillion to jump start growth.
But the prospect of reduced monetary stimulus has kept financial markets edgy, with investors nervously sifting through clues to gauge how big central banks around the globe will unwind unconventional policy that have kept borrowing costs at rock bottom.
The ECB kept its deposit rate deep in negative territory and maintained monthly bond purchases at €60 billion, in line with the expectation of most analysts in a Reuters poll.
"If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration," it said.
ECB president Mario Draghi sent bond yields and the euro sharply higher last month when he argued that improved growth on its own would provide accommodation so the ECB would tighten its own policy to keep the overall level of accommodation broadly unchanged.
With the euro firming more than 3 per cent and German 10 year yields doubling since Draghi’s policy hint, analysts expect Draghi to temper or at least nuance the message to keep markets at bay.
Indeed, the euro’s 11 per cent rise this year will weigh on inflation, compounding the impact of a more than 10 per cent drop in crude oil prices.
Still, the ECB is unable to kick the can down the road indefinitely as its asset buys are set to run until the end of the year and policymakers argue that a decision on an extension or a gradual wind down has to be taken in September or October.
Acknowledging the coming inflation headwinds, Draghi has argued that these are temporary so the ECB needs to look past them, reinforcing expectations for some tightening in the coming months.
Most economists polled by Reuters expect tapering from next year but unlike the US Federal Reserve, which cut buys at each meeting when it ended its own asset buys, the ECB could simply extended the buys at a lower volumes to avoid creating an impression that it was on a preset course to wind down the buys.
Indeed, policymakers told Reuters earlier that they would not want to put an end date on the buys or a schedule on tapering, maintaining flexibility and avoiding a perception that it was on a preset course.
The biggest headache for the ECB is the apparent disconnect between inflation and growth.
Having bought trillions of euros worth of government and corporate debt for years, the ECB has rekindle growth and the euro zone is creating jobs faster than expected.
But wage growth remains anaemic, keeping a lid on inflation, which is likely to undershoot the ECB’s target of almost 2 per cent at least through 2019, suggesting that easy monetary policy will have to continue for years to come.
-(Reuters)
