ECB Keeps Bond-Buying, Rates Unchanged

The European Central Bank kept its quantitative-easing program unchanged as policy makers gauge whether a recent jump in inflation will endure.

The Governing Council reaffirmed its decision that monthly asset purchases will be reduced to 60 billion euros ($63 billion) from April, compared with 80 billion euros currently. Policy makers also left the main refinancing rate at zero and the deposit rate at minus 0.4 percent, as predicted by all economists in a Bloomberg survey.

The ECB also said rates will stay at present or lower levels for an extended period, and well past the horizon of net asset purchases. President Mario Draghi will explain the decision in a press conference at 2:30 p.m. in Frankfurt.

The euro fell after the decision to trade little changed at $1.0551 at 1:49 p.m. Frankfurt time.

Exactly two years after the ECB started buying euro-area government bonds, inflation is above its goal and calls to reduce the stimulus are mounting. Draghi has sought to defuse the pressure by pointing out that price acceleration is largely driven by energy costs, and that political risks including national elections have the potential to knock the recovery off course.

The Governing Council’s decision sticks to a line set back in December, when it announced that bond purchases will be extended until at least the end of 2017. That will take the total amount of assets bought during the program to 2.28 trillion euros, equivalent to a quarter the size of the entire euro-area economy.

Fresh Forecasts

Draghi will unveil fresh inflation forecasts at his press conference that are likely to support the decision to press on with stimulus. While the projection for this year will be raised to about 1.7 percent from the current 1.3 percent, price growth will then stay at about those levels — and below the ECB’s goal — for the following two years, according to euro-area officials familiar with the matter.

The outlook for next year will be increased to approximately 1.6 percent from 1.5 percent, and the rate for 2019 will remain unchanged at 1.7 percent, said the people, who asked not to be identified because the forecasting process is confidential. The projections aren’t final until they are published, and a spokesman for the central bank declined to comment on the matter.

The council also doesn’t plan to announce a fresh round of long-term loans to banks, the people said. The last of the targeted longer-term refinancing operations, which have so far delivered 570 billion euros to lenders to encourage credit supply to companies and households, is scheduled for March 23.

Economists are already beginning to map out a time line for the end of stimulus, with policy makers seen waiting until at least June before upgrading their assessment of the risks to the euro-area recovery, according to most respondents in a Bloomberg survey. It will take until at least the end of next year, and possibly into 2019, before the ECB starts to remove stimulus in earnest and raise interest rates.

The decision comes as the Netherlands prepares for March 15 elections, with Geert Wilders’ euro-skeptic Freedom Party among the contenders to place first. Two days later, Group of 20 finance chiefs will seek a better sense of any U.S. trade protectionism at a meeting in Baden-Baden, Germany. The U.K. is planning to start formal negotiations this month on leaving the European Union.

A chief concern is France, where Marine Le Pen has promised to renegotiate the country’s membership in the European Union and the single currency if she is elected president in May. Germany, also facing a rise in populist sentiment, heads to the polls in 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