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European Central Bank sticks to plan to end stimulus

Oct 25, 2018 | 6:00 AM

FRANKFURT — The European Central Bank said Thursday it is staying on course to wrap up its 2.5 trillion euro ($2.85 trillion) stimulus program at the end of the year, even as risks from trade protectionism, Italian populist policies, and Brexit loom ever larger.

The central bank for the 19 countries that use the euro left its key interest rates and the end-date for its stimulus program unchanged at its meeting in Frankfurt, Germany.

Its president, Mario Draghi, told a news conference that the eurozone economy was seeing “somewhat weaker momentum… not a downturn” as he explained the bank’s stay-put stance.

Economic indicators have softened in recent months amid a range of risks: from Britain possibly leaving the European Union without a negotiated exit deal in March 2019, to increasing trade protectionism and Italy’s dispute with EU authorities over its spending plans.

Those risks have grown, but for now they remain risks — things that could damage the economy but haven’t actually happened yet, or not to such a degree that it would force the central bank to abandon its plans and prolong its support for the economy.

The ECB is sticking to its plan to end its stimulus program — under which it buys 15 billion euros a month — in December. That means it would not raise rates before next summer at the earliest.

Draghi noted that the recent economic slowdown was from unusually strong levels last year.

“Is this enough of a change to make us change the baseline scenario?” he said. “The answer is no.”

He said it “would really take an extraordinary amount of lack of preparation” for Britain to fall out of the EU without a deal, but that financial unease could grow if the March 2019 exit date continues to approach without any sign of agreement.

A no-deal exit for Britain could hurt trade with the country’s largest business partner, the EU, and disrupt the movement of goods and parts for businesses.

Meanwhile, Italy’s public spending plans could trigger a re-emergence of the eurozone’s debt crisis — if bond investors start thinking the country is too risky. And a trade war between the U.S. and China could hurt global trade, dealing collateral damage to export-dependent Europe.

By bringing the bond purchases to an end, the ECB is following the same path as the U.S. Federal Reserve in withdrawing stimulus deployed to overcome the persistent effects of the global financial crisis and Great Recession a decade ago. The Fed is farther along, raising its key interest rates and letting the bonds that it bought as part of its own stimulus program expire.

Yet just as it seemed the coast was clear, with the European economy growing and unemployment falling, the new risks have appeared and growth has slowed, to a quarterly rate of 0.4 per cent in the second quarter, from 0.7 per cent at the end of last year.

And while headline inflation has hit 2.1 per cent, the underlying rate that excludes volatile items like fuel and food remains much lower at 0.9 per cent. The ECB says it is confident the headline inflation rate will remain sustainably near its goal of just under 2 per cent.

The ECB has made clear it doesn’t intend to back off on the basis of a few bits of data.

One reason for staying the course: the bank is continuing other means of support even after the bond purchases end, meaning monetary policy remains loose and interest rates low. It has said it will keep buying new bonds as the old ones it has bought are paid off, maintaining the equivalent level of stimulus by keeping borrowing rates down.

Meanwhile, it has made clear it will keep its key interest rates at current ultra-low levels until “at least through the summer of 2019.” Right now, the central bank’s benchmark for lending to banks that need ready cash is zero and the rate for deposits it takes from banks that have excess money is minus 0.4 per cent. That negative rate aims to pushing banks to lend the money, not let it pile up.

David McHugh, The Associated Press