ECB’s Policy Decision Meeting (June 8 )

Pinestone Investments

The European Central Bank closed the dooron more interest rate cuts on Thursday, judging the eurozone economy to be rebounding, but said inflation looks to remain weak for years so it still needs to pump out the cash.  The currency bloc has been on its best economic run since the global financial crisis nearly a decade ago with millions of jobs created since the ECB’s stumulus effort started.  But inflation is barely moving upward and growth may be plateauing, putting the ECB into a difficult spot.  Acknowledgeing improved prospects, the ECB dropped a pledge to cut rates if necessary and gave up a long-standing reference to risks to the economy, declaring the outlook “balanced.”  Yet, policy makers did not even discuss winding down the ECB’s 2.3 trillion euro ($2.6 trillion) asset purchase scheme, kept interest rates below zero, and pledged very substantial accommodation.  “We consider that risks to the growth outlook are now broadly balanced,” ECB President Mario Draghi told a news conference in the Estonian capital of Tallian.  With Thursday’s decision, the ECB’s deposit rate, its key policy tool, remains at -0.4 percent.  Its monthly asset purchases will continue to total 60 billion euro per month and to run until at least December.  According to the latest assessment based on the calculation of Eurostat,  annual HICP inflation is expected to be 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019, which still shorts of its target of close to 2 percent.  In the euro area, consumer price inflation is measured by the Harmonized Index of Consumer Prices (HICP).  Relating to real GDP, the latest projections forsee annual real GDP of the 19-country eurozone increasing by 1.9% in 2017, by 1.8% in 2018 and by 1.7% in 2019.  The next major test of the ECB will come in September, when the bank will probably decide whether it will continue bond purchases beyond this year or start to wind them down, known as tapering.  The ECB’s nuanced stance here was also motivated by the 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.

Kazuhide Matsuishi

Comments are closed.