By: Miles Pearson – Forex Focus
Europe’s central bank pledges to curtail its asset-purchase program from October.
The Governing Council of the European Central Bank (ECB) left key interest rates unchanged, in line with market expectations, following its September monetary-policy meeting. Interest rates on main refinancing operations currently stand at 0.00 percent, while rates on marginal lending facilities will remain at 0.25 percent and interest on deposits will continue at -0.40 percent. The ECB also made it clear that the current interest-rate regime will continue through the summer of 2019 and possibly further, until the medium-term inflation outlook in the region converges at levels around 2.0 percent.
Under its non-standard monetary-policy measure, the bank reiterated its intention to scale down the size of its net monthly asset-purchase program (APP) from €30 billion to €15 billion from October to December of this year before withdrawing it completely, provided incoming economic data from the eurozone confirms the medium-term inflation outlook of the central bank. In addition, to maintain sufficient liquidity in the system, the central bank also stated that it would reinvest principal payments from maturing securities under the APP for an extended period of time post the closure of the monthly purchase program.
During the last four years, Europe’s central bank has accepted more than €2.5 trillion in debt to stimulate economic growth in the region composed of 19 countries in the eurozone bloc, after suffering what many analysts claim was a double-dip recession.
Addressing a press conference following the monetary-policy meeting, ECB President Mario Draghi said that the ongoing expansion in the eurozone economy is broad-based with inflation rising progressively, which more or less conforms with the earlier assessments of the central bank, and he hopes the underlying economic growth will be sustained even after the ECB winds down its asset-purchase program. He, however, cautioned that uncertainties arising due to protectionism—a veiled reference to the United States, where President Donald Trump’s administration has been levying import tariffs on steel and aluminium to support manufacturing locally—and vulnerability in some emerging-market economies leading to sudden falls in the value of domestic currencies vis-a-vis the US dollar as well as the ongoing volatility in global financial markets are more prominent of late. According to the statement, the recent global developments require significant monetary stimuli to ensure that the ongoing price pressure is maintained and headline inflation within the eurozone continues to move upwards. Draghi also said that the ECB will continue to extend support with its net asset purchase until the end of this year and is prepared to effect changes to its existing policies until inflation moves in the direction of the bank’s projected trajectory in a sustained manner.
On the growth front, the bank’s assessment broadly reflects the projections put out in September, when the ECB estimated annual real gross domestic product (GDP) in the euro area to grow at 2.0 percent in 2018, 1.8 percent in 2019 and 1.7 percent in 2020, although Europe’s central bank revised the forecast for 2018 and 2019 lower from the June outlook due to a fall in foreign demand.
Based on Eurostat’s flash estimates, annual HICP (Harmonised Index of Consumer Prices)inflation in the eurozone came in at 2.0 percent in August, slightly lower than the 2.1 percent reported in July. However, policymakers expect underlying inflation to continue strengthening on the back of domestic price pressures arising from a robust labour market and subsequent wage growth. The assessment for inflation is broadly in line with the June and September projections, in which annual HICP inflation is expected to remain around 1.7 percent for the current and coming two years.
To conclude, the ECB remains optimistic about the growth prospects in the euro area and forecasts risks to be broadly balanced. However, the central bank remains guarded in its outlook on the rising protectionism of the US, financial-market volatility and risks faced by some of the large emerging-market economies, and it has indicated that ongoing monetary-policy measures will reach full potential only if other key policy areas contribute significantly to the long-term growth potential in the region. In addition, the central bank stressed upon countries within the eurozone the need to step up structural reforms to increase resilience and boost employment, productivity and growth. In countries in which government debt is high, the bank recommended the creation of fiscal buffers to safeguard fiscal positions and consistently implement the European Union’s fiscal-policy measures to defend the euro area economy and strengthen the overall functioning of the economic and monetary union.