In World Economy News 28/04/2017
The European Central Bank stuck to its ultra-easy policy stance as inflation continues to undershoot its target but explicitly acknowledged the vigour of the euro zone economy, now on its best run since the global financial crisis.
Despite calls from Germany, the euro zone’s economic powerhouse, for a gradual reduction of stimulus, the ECB even left the door open to further rates cuts or an increase in asset buys.
But ECB President Mario Draghi noted that the euro zone’s economy had further improved and the risk of a new downturn had receded, a signal seen by many as foreshadowing a bolder change at the next meeting in June.
“Incoming data since our meeting in March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished,” Draghi told a news conference.
“At the same time, underlying inflation pressures continue to remain subdued and have yet to show a convincing upwards trend,” he added, justifying the continued stimulus measures.
Traders argued that Draghi’s comments were more cautious than they had expected and the euro fell against the dollar while yields on euro zone government bonds, which tend to move in tandem with central bank rates, dipped.
Euro zone economic growth is steadily picking up pace and the risks to the survival of the single currency are receding after pro-euro centrist Emmanuel Macron won the first round of France’s presidential vote.
In this context, sources on and close to the ECB Governing Council told Reuters before the meeting they were seeing scope for taking out some of the easing biases, such as the reference to “downside risks”, at their June meeting.
Indeed, Draghi said some ECB rate setters had become more sanguine about the economy.
“There’s enough from today to suggest that we might see a material change in policy in June,” James Athey, an investment manager at Aberdeen Asset Management, said.
“But no one should get ahead of themselves. There’s clearly not enough consensus on the Governing Council.”
SNAIL PACE
Having missed its 2 percent inflation target for years and even flirted with deflation, the ECB confirmed it would buy 60 billion euros worth of bonds per month at least until the end of the year and keep interest rates in negative territory until later.
With its policy arsenal nearly depleted and inflation now comfortably above 1 percent, policymakers from Germany and other northern euro zone countries are calling for mapping out the way to the exit.
However, Draghi said that inflation was still not firmly in place despite better economic growth.
“We have not seen sufficient evidence to alter our assessment of the inflation outlook, and we are not sufficiently confident that inflation will converge to levels consistent with our inflation aim in a durable and self-sustaining manner,” said.
ECB policymakers will have a chance to reassess the situation in June, when the bank publishes new growth and inflation forecasts.
“The ECB is edging closer to the exit at a snail’s pace,” economists at Berenberg said in a note to clients.
Just over half of the economists polled by Reuters earlier this month expect the ECB’s next move to be an extension of its programme.
Draghi’s caution was mirrored on Thursday by the central banks of Japan and Sweden, which stuck to their own bond-buying programmes despite better economic growth.
Source: Reuters (By Balazs Koranyi and Francesco Canepa, Writing by Mark John; Editing by Jeremy Gaunt)
