By Laurie Laird
FRANKFURT (MaceNews) – The European Central Bank Thursday confirmed its intention to end quantitative easing at year end, despite marked signs of weakness in the euro zone economy, but stressed a commitment to reinvesting proceeds of previous bond purchases over the medium term or longer.
We intend to continue to reinvesting, in full, the principal payments from maturing securities … for an extended period of time past the date when we start raising the key ECB interest rates,” said the statement released after Thursday’s governing council meeting.
Those rates were unchanged, with the deposit facility holding at -0.4% and the main refinancing operations rate at 0.0%.
The renewed emphasis on what the ECB terms enhanced “forward guidance on reinvestment” comes on the heels of sluggish economic data out of much of the bloc. Germany’s economy contracted by 0.2% in the third quarter, the first reverse since the first quarter of 2015, while Italian gross domestic product declined by 0.4%.
ECB President Mario Draghi hinted of German weakness following the Bank’s October governing council meeting, attributing the slump to a temporary pressure on the auto industry ahead of the introduction of new emissions standards.
Industrial product across the euro zone recovered modestly at the start of the fourth quarter, rising by 0.2% in October, after a 0.6% drop in September.
Addressing reporters after Thursday’s meeting, Draghi reiterated the risks to the euro zone economy “can still be assessed as broadly balanced,” but added that “the balance of risks is moving to the downside.”
Those risks — mainly geopolitical uncertainty, the threat of protectionism, emerging market instability and financial market volatility — formed the “focal point” of the governing council’s discussions, according to Draghi, although he expressed optimism that the many of those threats had dissipated since the October meeting.
He also highlighted the strength of euro zone domestic demand, boosted by continued employment growth and accelerating wage inflation.
Still, the ECB shaved its economic forecasts for the next several years, reducing 2018 growth by 0.1 percentage point to 1.9% and lowering the guidance for 2019 by the same magnitude, to 1.7%. By 2021, inflation will reach 1.8%, according the updated forecasts, well below the ECB’s target of close to but below 2%.
While Draghi stressed that the governing council “stands ready to adjust all of its instruments as appropriate,” the council did not discuss a resumption of its asset-buying programme should inflation continue to fall short of target.
“We are confident, and we remain patient and persistent. So there was no need to ask ourselves this question,” he said.
The ECB president mentioned the economic risks of rising protectionism on numerous occasions at Thursday’s briefing, but was unable to quantify the potential effects of trade tensions on growth, giving the changing nature of rhetoric coming out of world’s largest economies.
“It’s not as if we can model mood change,” he said, in answer to a question posed by Mace News. “But [trade tensions] have an effect on confidence and other business decisions.”
— Courtesy of MT Newswires