Sunday 22 September 2019

Interest rate on hold as ECB unveils cut to stimulus plan

ECB president Mario Draghi
ECB president Mario Draghi

Colm Kelpie

The Euro weakened yesterday after the European Central Bank announced it was cutting its massive stimulus plan but extending it to run until September.

The Frankfurt-based central bank opted to cut its bond buying programme to €30bn per month from the current figure of €60bn, as of January. But it extended the scheme's lifespan by a further nine months, signalling to investors that despite strong growth, work must continue as inflation remains low.

ECB President Mario Draghi called the changes a "recalibration" and indicated that the bank's work in boosting inflation and ensuring growth was not yet done. Interest rates were left unchanged as expected and the ECB reaffirmed its guidance to keep them unchanged until well after its bond buys end.

"Given the broad-based and strengthening economic recovery in the eurozone, the ECB made the right call to reduce asset purchases, which hawkish members of the committee have been keen do for some time," said Josie Dent, economist with the London-based Centre for Economics and Business Research.

"They argue that the economic recovery of the eurozone has meant that the scheme has lost its chief purpose - propping up a weak economy.

"There have been additional concerns about the dwindling amount of German debt available for purchase, since the government's budget surplus has meant that the country's pool of debt has been shrinking."

Eurozone bond yields fell after the announcement on what traders said was relief over the programme's continuation, albeit with less buying.

Mr Draghi said that the eurozone economic outlook had improved but that core inflation had not yet shown any convincing signs of an upwards trend - the goal of much of the stimulus.

"Domestic price pressures are still muted overall and the economic outlook and the path of inflation remain conditional on continued support from monetary policy," he said. "Therefore, an ample degree of monetary stimulus remains necessary."

David Lamb, head of dealing at Fexco Corporate Payments, said Mr Draghi's talk of "recalibration smacked of dogma rather than decisiveness".

"The eurozone's increasingly robust fundamentals had led the markets to price in the reduction of the ECB's money-printing programme with one simple mantra - 'if not now, when?'

"What they got instead was a QE reduction hedged with an extension - less for longer - that left many Eurowatchers feeling flat."

Mr Draghi said that there had been some difference of views among the rate-setters but that decisions were taken in a positive attitude.

Countries like Germany and the Netherlands have wanted a commitment to end bond buys, arguing that growth is now above trend and that more purchases do next to nothing for inflation.

"So well had the ground been laid for today's meeting that we would expect little further market movement following the ECB's decision to move to smaller monthly asset purchases," said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets.

"In reducing monthly purchase amounts to €30bn for an additional nine months, their actions are largely in line with market expectations, (Additional reporting Reuters)

Irish Independent

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