wnol.info May 20 2018

European Central Bank won't call time on stimulus just yet

May 20 2018, 05:35 | Alonzo Simpson

European Central Bank won't call time on stimulus just yet

European Central Bank won't call time on stimulus just yet

The statement that inflation remains weak supports the central bank's reluctance to announce an end to its bond-buying stimulus program or to raise interest rates from record lows.

On Thursday, the European Central Bank repeated its standard guidance that it expects its key interest rate to remain at their present level for an extended period of time and well past the horizon of its asset purchases.

That's keeping wage growth at bay - or as Draghi put it on May 29 in his final public remarks before Thursday's decision: "We remain firmly convinced that an extraordinary amount of monetary policy support, including through our forward guidance, is still necessary".

Draghi made the statement as the central bank lowered its forecasts for inflation this year to 1.5 percent from 1.7 percent, and for next year to 1.3 percent from 1.6 percent. Analysts think the bank might announce that in September.

That came after the European Union statistics agency Eurostat earlier revised up its estimate of first quarter growth to its fastest rate in two years, saying the economy of the 19-country euro zone expanded by 0.6 percent quarter-on-quarter and by 1.9 percent year-on-year.

The main refinancing rate, which determines the cost of credit in the economy, was unchanged at 0.00 percent while the rate on the marginal lending facility - or emergency overnight borrowing rate for banks - remains at 0.25 percent.

European Central Bank won't call time on stimulus just yet

The ECB's quantitative easing programme is on track to rack up €2 trillion of asset purchases by year end. In the year to May it was 1.4 percent and the European Central Bank doesn't expect much change over the coming two years. At the bank's last meeting in April, Draghi said risks were "tilted to the downside".

The euro hit a one-week low of $1.11995, down around 0.4 percent on the day, as Draghi spoke. That would barely rise to 1.6 percent in 2019, down from an earlier estimate of 1.7 percent and further away from its official target of at or close to two percent.

Investors are also keeping an eye on the outcome of the United Kingdom general election, with opinion polls showing Theresa May's Conservative Party leading between 5 and 12 percentage points over the main opposition Labour Party, suggesting she would increase her majority.

Among other factors making the ECB cautious are big debts overhanging governments and companies, the piles of unpaid loans weighing on banks in countries like Italy and Portugal and political uncertainty ahead of elections in Germany and Italy.

The ECB's hawkish camp, which includes the governing council's German membership and board member Benoit Coeuré, has long argued that the council should tweak its message on the euro zone's economic outlook. "I didn't hear any dissenting voice. with respect to the proposals", he said.

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