ECB Leaves Bond-Buying Program Unchanged as Inflation Gains

The European Central Bank left its quantitative-easing program unchanged as policy makers wait to see if a pickup in inflation will be sustained.

The Governing Council reaffirmed its December decision that asset purchases will be reduced to 60 billion euros ($64 billion) a month from April, from 80 billion euros currently. Policy makers also kept the main refinancing rate at zero and the deposit rate at minus 0.4 percent, as predicted by all economists in a Bloomberg survey. President Mario Draghi will explain his assessment of the euro-area economy in a press conference at 2:30 p.m. in Frankfurt.

The first policy decision of 2017 comes six weeks after Draghi declared the threat of deflation to be almost vanquished. Price growth in the region is starting to accelerate after almost four years of undershooting the ECB’s goal, and in a sign that sentiment is gradually changing, Executive Board member Benoit Coeure acknowledged last month that the balance of risks to inflation is shifting.

The continuation of stimulus is likely to draw criticism in Germany, the euro area’s biggest economy, where there was media outrage after the nation’s inflation rate more than doubled to 1.7 percent in December. The ECB’s policies have come under attack from politicians ahead of elections scheduled for this year.

The government will face “political problems” explaining ECB monetary policy to the public, Finance Minister Wolfgang Schaeuble said in a Bloomberg Television interview after the decision. Speaking at the World Economic Forum in Davos, Switzerland, he added that “it is in Germany’s interest that the euro zone as a whole is successful.”

Euro-area consumer prices rose an annual 1.1 percent in December, more than twice as much as in November and the most since 2013. Even so, the rate remains well below 2 percent, and officials have expressed concern that the increase so far is largely due to oil. Core inflation picked up only slightly to 0.9 percent, still lacking a convincing upward trend.

Return of Inflation

There is little sign that the Governing Council is ready to endorse more hawkish language just yet, even after a jump in inflation to 1.7 percent in Germany, the region’s largest economy, sparked media outrage.

While Bundesbank President Jens Weidmann has said the ECB should “tighten the reins” as soon as feasible, Austria’s Ewald Nowotny, France’s Francois Villeroy de Galhau and Executive Board member Yves Mersch have all indicated that they see worries about a return of inflation as exaggerated.

Political uncertainty in the year ahead may also give officials reason to be cautious. Economies including Germany, France and the Netherlands will hold elections in which euro-skeptics might gain increased support, and the U.K. is set to start formal talks on leaving the European Union. A further risk comes from any protectionist action by Donald Trump, who will be inaugurated as U.S. president on Friday.
Three-quarters of economists surveyed by Bloomberg before the decision said the ECB’s next major change to stimulus will be announced no sooner than September.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell