Mario Draghi warned that the European Central Bank’s newest stimulus push might not be the last as it strives to reach its inflation goal.
“The intention of the monetary-policy decisions is to maintain the extraordinary degree of accommodation in place,” the ECB president told reporters in Frankfurt after the Governing Council agreed to add 540 billion euros ($576 billion) to its bond-buying program and extend it until the end of next year. If “the outlook becomes less favorable or financial conditions become inconsistent with further inflation progress, the Governing Council intends to increase the program in size or duration.”
The ECB’s fresh action comes amid concern that the euro area’s gradual economic recovery risks being derailed as political uncertainties cloud the outlook. Draghi and his colleagues have frequently stressed that the upturn is largely reliant on continued monetary easing as governments fail to play their part with economic reforms.
While he unveiled new staff economic projections showing euro-area inflation averaging 1.7 percent in 2019, he also said that figure is “not really” close to the central bank’s goal of just under 2 percent, and reiterated the ECB’s line that the baseline scenario is subject to downside risks.
That suggests the Governing Council might be ready to keep stimulus running for longer than currently scheduled. Draghi said officials didn’t discuss tapering of purchases to zero.
The euro fell as he spoke, trading down 1 percent at $1.0642 at 3:19 p.m. Frankfurt time. German 10-year bonds earlier climbed to the highest since January after the ECB announced that it will continue asset purchases after the previous end-date of March 2017, but at 60 billion euros a month instead of the current 80 billion euros.
Most economists surveyed by Bloomberg had predicted the program would be prolonged at the current pace for about six months. The ECB also kept its main refinancing rate unchanged at zero and the deposit rate at minus 0.4 percent.
The fresh stimulus will take holdings to at least 2.28 trillion euros, or twice as much as was initially envisaged when broad-based QE started in early 2015. The decision to extend QE had “very broad consensus” and the risk of deflation has largely disappeared, Draghi told journalists in the press conference.
The extension will be accompanied by adjustments to the program’s rules, a move necessary to avoid running out of assets to buy. Central banks will be allowed to buy debt with a yield below the deposit rate, previously a minimum eligibility requirement. The minimum duration of debt was lowered to 1 year from 2 years.
Many economists had also predicted the ECB would increase the share of bonds it could buy to as much as 50 percent. Most issue and issuer limits are set at 33 percent. Draghi cited “an increasing awareness of legal and institutional constraints” for not taking that step.
He reiterated his call for governments to implement structural reforms that can cement the recovery, saying that political concerns are no excuse. Germany, France and the Netherlands all have elections in 2017, following on from political upsets in the U.K. and Italy — as well as the U.S. — this year.
“Countries that need reforms need to undertake them regardless of what is the general political uncertainty,” he said. “The best way to deal with uncertainty is to restore growth, job creation.”
Euro-area inflation was 0.6 percent last month and hasn’t been in line with the ECB’s goal since early 2013, with forecasts repeatedly being lowered. With that in mind, Draghi said policy makers haven’t discussed how they would react to better-than-expected economic data.
“We seem to be far away from any such high-class problem.” he said. “There are no signs yet of a convincing upward trend in underlying inflation.”