ECB drops pledge to buy more bonds if needed
The European Central Bank has dropped its easing bias on its asset purchase programme as it holds rates again following its governing council meeting
* Main rate held at 0.00%, deposit facility at -0.4%
* QE programme runs until end of September
* Euro bounces back against dollar
The European Central Bank has taken a further step towards ending its crisis-era stimulus measures, dropping an explicit commitment to buy more bonds and expand its quantitative easing programme if necessary.
The ECB’s governing council removed the explicit aim to intervene more aggressively in bond markets should growth disappoint, the so-called “easing bias”, from its regular statements. This came after mounting evidence that the bank’s measures have worked in spurring growth.
The move, which follows decisions to scale down QE from €80bn to €60bn and ultimately €30bn a month, indicates the bank is becoming increasingly confident that growth in the region can survive without its extraordinary monetary support.
The ECB is expected to call time on buying new bonds under the €2.3tn QE programme later this year, possibly as soon as September. However, it is expected to maintain interest rates at record lows until mid-2019.
The euro rose after the announcement and extended its gains during a press conference by Mario Draghi, ECB president. The currency hit a day high of $1.2466 as he was speaking, up 0.3 per cent on the session. The move took its year-to-date rally against the dollar to 3.6 per cent. Eurozone government debt yields also rose as the ECB moved away from the QE programme.
In the text of the “easing bias”, included in previous monetary policy statements, the ECB’s governing council declared itself ready to increase the asset purchase programme “in terms of size and/or duration” in the event of a downturn in the economic outlook or turmoil in financial markets.
Hawks on the 25-member council have long complained that economic improvements had made such language redundant and argued that its inclusion in the ECB’s forward guidance appeared outdated.
Mr Draghi said last year that the bank had defeated the threat of deflation. In December, policymakers declared that the eurozone’s economy was no longer merely recovering but in a stronger, expansionary phase.
Mr Draghi said that ECB staff had revised the forecast for eurozone 2018 growth upwards to 2.4 per cent, compared with the 2.3 per cent estimated in December. Growth estimates of 1.9 per cent for 2019 and 1.7 per cent for 2020 were unchanged from the December figures.
The ECB staff still expects inflation of 1.4 per cent this year, but revised the inflation estimate for 2019 downwards from 1.5 per cent to 1.4 per cent. It still expects 2020 inflation of 1.7 per cent.
Doves on the council argued that the prevalence of low inflation meant the easing bias should remain in place — especially in an environment in which political risks to growth remain.
In his press conference, Mr Draghi referred to “rising protectionism” alongside currency appreciation as one of the threats to the eurozone’s otherwise balanced growth prospects.
The ECB president was also likely to be quizzed on scandals in Latvia, which have ensnared the country’s central bank governor and ECB governing council member Ilmars Rimsevics, raising doubts about the central bank’s supervision of the Baltic state’s lenders.
The ECB eventually forced the closure of the country’s third-largest bank ABLV after US Treasury allegations that the lender had helped facilitate the funding of North Korea’s missile programme — allegations the bank denies. Mr Rimsevics, who denies separate allegations of bribery, did not attend Thursday’s council meeting.
The bank kept the benchmark main refinancing rate at zero. The deposit rate remains at -0.4 per cent