ECB keeps rates unchanged, slashes monthly bond purchases

Published 26.07.2018 15:22
In this file photo taken on September 7, 2017 the European Central Bank (ECB) is seen in Frankfurt am Main, Germany. (AFP Photo)
In this file photo taken on September 7, 2017 the European Central Bank (ECB) is seen in Frankfurt am Main, Germany. (AFP Photo)

The European Central Bank is stressing that interest rates will stay low well into next year even as the U.S. Federal Reserve is expected to keep raising rates in coming months.

The central bank for the 19 countries that use the euro left its key rates and monetary stimulus settings unchanged at a meeting Thursday at its headquarters in Frankfurt, Germany.

Investors are looking for more clarity from ECB President head Mario Draghi's subsequent news conference on when interest rates might start to rise next year.

The Frankfurt-based bank also said it was cutting its monthly bond purchases from 30 billion euros ($35 billion) to 15 billion euros from October to December, when the quantitative easing scheme is due to end. The announcement surprised observers.

Alongside ultra-low interest rates, bond-buying or quantitative easing (QE) was designed to pump cash through the financial system and into the real economy, stoking growth and in turn powering inflation towards the central bank's 2.0 percent price stability target.

After more than three years and some 2.4 trillion euros of QE, eurozone inflation hit 2.0 percent in June after 1.9 percent in May.

But with their eyes on meeting the target over the medium term, ECB policymakers are unlikely to budge from plans to leave interest rates at their historic lows -- the other pillar of its support to the economy -- until at least summer next year.

The bank said it will keep interest rates on hold "through the summer" of 2019. Speculation on what that means has ranged from July to September or even later.

The ECB is withdrawing stimulus as the economy grows, but doing it so slowly that its path is diverging sharply from that of the Fed, which is already raising rates. The Fed has withdrawn stimulus more quickly because the U.S. economy emerged from the Great Recession more quickly, and now has lower unemployment.

The rich world's major central banks — also including the Bank of England and the Bank of Japan— are slowly withdrawing stimulus measures they deployed to support the economy during and after the global financial crisis and Great Recession.

The end of the stimulus will have wide-ranging effects, such as increasing borrowing costs for governments and home buyers. By raising returns on safe assets such as bonds and savings accounts, it could also make those holdings more attractive relative to stocks and change investor attitudes toward the risks of the longstanding bull market. The ECB is proceeding gingerly to avoid market disruptions.

ECB officials have expressed confidence that inflation is sustainably trending toward their goal of just under 2 percent. It came in at 2 percent in June, although when excluding volatile items like oil and food, prices remain weaker. The central bankers are still keeping a wary eye on recent signs of weaker growth, and on the chance that a trade conflict between the United States and other countries could hurt global trade and thus the export-dependent European economy.

Lower exchange rates in the eurozone can help keep the euro's exchange rate lower against the dollar, which helps European exporters.

The ECB's short-term benchmark rate was unchanged at a record low of zero, as was the negative 0.4 percent rate on deposits it takes from banks. That is a penalty aimed at pushing the banks to lend and support the economy rather than hoard the money. By comparison, the Fed's key rate is in a range between 1.75 percent and 2 percent and more rate increases are expected this year.

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