European Central Bank keeps door ajar for more stimulus

The central bank on Thursday left its main interest rates on hold and maintained the scale and duration of its bond-buying program.

By: AP | Frankfurt | Published:October 20, 2016 7:24 pm
European shares, Europe banking sector, Europe Osram, Osram, Stoxx 600 index, European Central Bank, European banking stocks, Deutsche Bank, Unicredit, business, banking and finance, World News, business news A sculpture showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt December 8, 2011. REUTERS/Alex Domanski

The European Central Bank has left the door open to an extension of its stimulus program at its next meeting in December, when it will be armed with new forecasts for the economy of the 19-country eurozone. The central bank on Thursday left its main interest rates on hold and maintained the scale and duration of its bond-buying program. In a press briefing, ECB President Mario Draghi said the bank is ready to do more to shore up the eurozone economy over the coming months. But that there was no discussion at this meeting over any changes to the current array of stimulus measures.

The bank, he insisted, “is committed to preserving the very substantial degree of monetary accommodation” but that other policy measures, such as structural reforms by governments in the eurozone need to be “substantially stepped up.” Draghi said reforms would boost productivity, improve the business environment, and boost jobs.

“In an environment of accommodative monetary policy, the swift and effective implementation of structural reforms will not only lead to higher sustainable economic growth in the euro area but will also make the euro area more resilient to global shocks,” he said.

Though Draghi continued to stress the importance of structural reforms to the eurozone’s economy, many experts think the bank will expand its stimulus program in December. One measure it could take would be to extend the 80 billion euros ($88 billion) in monthly bond purchases beyond March 2017, currently the earliest possible end-date.

He said an abrupt end to the current bond purchases is “unlikely” and that tapering – a gradual phasing of the bond-buying program – was not discussed at Thursday’s meeting.

The ECB’s other stimulus measures have included cutting to zero its benchmark refinancing rate, which means banks can borrow from it interest-free, offering unlimited cheap loans to banks, and cutting the rate on deposits banks leave with it overnight to minus 0.4 percent. That negative rate is in effect a tax intended to push banks to lend excess funds, not hoard them at the central bank.

What the ECB does over the coming months will hinge on economic developments, many of which the bank can do little about, such as the scale of the slowdown in China, the outlook for oil prices and the impact of Britain’s exit from the European Union.

Draghi conceded that risks to the eurozone’s economic growth remain “tilted to downside” and that those risks were largely related to the “external environment.” Figures due to be released at the end of this month are expected to show that the eurozone economy grew at a tepid rate in the third-quarter.

The ECB is tasked with getting the annual rate of inflation running at just below 2 percent. In the year to September, despite doubling from the previous month, was still just 0.4 percent. Looking ahead, Draghi said inflation rates are likely to rise in 2017 and 2018 in large part as a result of the recent increase in oil prices.