By Laurie Laird
FRANKFURT (MaceNews) – The European Central Bank Thursday confirmed plans to reduce its quantitative easing programme by year end, even as its leadership acknowledged a recent slowdown in the euro zone economy.
The ECB reduced its purchase of assets to €15 billion at the end of September, and will cease the programme at the end of September, “subject to incoming data confirming our medium-term inflation outlook,” according to a statement issued at the conclusion of governing council meeting on Thursday. The council maintained its deposit rate at -0.4% and held its marginal lending rate at 0.0%.
However, ECB President Mario Draghi acknowledged that recent economic data suggest a slowdown in euro zone economic activity. “The assessment of the governing council is that there is weaker momentum; there are weaker survey data coming out,” said Draghi, adding that the softer indicators are not sufficient to push the council to “change the baseline scenario.”
Instead, recent weakness may simply represent a return to trend growth after an export-led acceleration over the final three months of 2017, when the euro zone economy expanded by a quarterly rate of 0.7%, before slowing to a pace of 0.4% in the first and second quarters of this year.
“We’re having growth returning to potential after 2017 when it was clearly above potential,” said Draghi, citing an unusual downturn in German car production in the current quarter as an “idiosyncratic” factor dampening growth.
Furthermore, the ECB president cited rising capacity utilisation and accelerating wage settlements in re-asserting his belief that euro zone inflation will soon hit the ECB’s target of close to, but below an annual rate of 2%. “We still observe consumption as pretty strong, buoyed by an expanding labour market and rising wages,” said Draghi.
But monetary policy will remain accommodative, even if the ECB’s quantitative easing programme ceases, as scheduled, in December. The reinvestment of principal payments from maturing securities previously purchased and the provision of forward guidance will continue to provide ample stimulus, he said. The central bank retains a “well-stocked tool box … rich in terms of monetary policy instruments,” Draghi added, without specifying the nature of such tools.
The ECB chief also expressed optimism that the European Commission will come to agreement with Italy over spending plans. Earlier this week, the Commission took the unprecedented step of rejecting a member state’s budget, after Italy forecast its deficit at 2.4% of gross domestic product, three times the debt pledged by a previous government. The Commission’s budget chief, Vladis Dombrovskis, attended Thursday’s council meeting, and authorised Draghi to share the Commission’s belief that upcoming dialog will lead to a budget compromise.
Draghi was similarly upbeat about the U.K.’s departure from the European Union, currently scheduled for the end of March 2019, despite the current deadlock in discussions between Britain and its European partners. “By and large, I’m still confident a good, common-sense solution will be found . … I wouldn’t call it a financial stability risk.”
The ECB president refused to be drawn out over questions of political interference in monetary policy, following President Donald Trump’s recent criticism interest rate hikes in the U.S. However, Draghi did stress that “central bank independence is a precious thing.”