Thursday 18 January 2018

ECB leaves interest rates untouched despite low-inflation forecast

The European Central Bank left interest rates on hold and unveiled no other measures to bolster a fragile eurozone recovery yesterday despite forecasting low inflation for years to come.

The ECB left its main interest rate at 0.25pc, a move generally expected by markets, and held the deposit rate it pays banks for holding their money overnight at zero.

New forecasts from ECB staff put inflation at 1pc this year, 1.3pc in 2015 and 1.5pc in 2016 – below its target of close to 2pc all the way through the projection.

ECB president Mario Draghi told a news conference that the latest economic information suggested recovery was on track and needed no extra push for now.

"We saw our (economic) baseline by and large confirmed," he said. "The news that has come out since the last monetary policy meeting is also, I would say, by and large on the positive side."

Inflation has been in what Mr Draghi calls the "danger zone" below 1pc for five months now and was running at 0.8pc at the last count.

The new forecasts saw the eurozone economy growing by 1.8pc in 2016 after 1.5pc in 2015 and 1.2pc this year, a slight upwards revision from its previous 2014 estimate but well below what is considered a trend rate of growth.

"Annual HICP (EU harmonised) inflation rates are expected to remain at around current levels in the coming months," Mr Draghi said. "Thereafter, inflation rates should gradually increase and reach levels closer to 2pc."

The forecasts presume an unchanged exchange rate and falling oil prices.


Mr Draghi rejected comparisons with Japan's experience of deflation, which became so entrenched that companies and households held off on spending on expectations of lower prices ahead, leading to two decades of economic stagnation.

ECB policymakers have insisted that so far there is no sign of eurozone citizens deferring spending plans.

The lack of action was significant given that last month Mr Draghi had signalled that by the March policy meeting the ECB would have enough information to judge the need for fresh stimulus.

The International Monetary Fund believes more needs to be done.

Reza Moghadam, head of the IMF's European department, said in a blog on Wednesday that the ECB should cut interest rates and pump out more money, perhaps through quantative easing

Like the Bank of Japan, which meets to set policy next week, the ECB is running out of room to cut interest rates, putting the onus on alternative policy measures.

An ECB source had predicted it would stop offsetting money it put into the financial system through government bonds it bought at the height of the euro debt crisis by withdrawing an equivalent amount of funds from week to week.

Irish Independent

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