FRANKFURT – The European Central Bank lowered its forecasts for economic growth in Europe this Thursday and next, but said it would push ahead with a carefully wired plan to phase out easy money.
The decision underscores the delicate task of the world's second largest central bank: the ECB has begun to deviate from the years of extremely low interest rates, such as the Federal Reserve, while the eurozone economy is weakening, limping from Brexit to vulnerabilities in the eurozone Neighbor, Turkey.
In a statement, the ECB said it will wind up its € 2.5 trillion ($ 2.9 trillion) bond purchase program known as Quantitative Easing or QE by the end of the year, confirming a June plan. The bank also expects to maintain its key interest rate at a record low of minus 0.4% by the summer of 2019 at least.
"When we stop [buying bonds]This does not mean that our monetary policy is no longer "supportive", said ECB President Mario Draghi at a press conference, pointing to low interest rates and a promise to keep interest rates where they are long.
The euro rose slightly against the dollar during Mr Draghi's press conference, but remains close to its lowest level in a year. This reflects the ECB's interest rate hike, although the Fed is likely to raise interest rates this year for the third time at the end of September. Yields on German government bonds rose slightly.
Earlier Thursday, the Bank of England's policymakers had taken similar cautious note and unanimously voted to keep interest rates at 0.75% despite strengthening growth and inflation. The central bank noted concerns about Britain's exit from the European Union next March, as lengthy negotiations create insecurity for businesses and households.
Mr Draghi warned that the risks associated with trade protectionism, emerging market weakness and volatility in the financial markets have "become more prominent lately".
The ECB has weakened its growth forecasts in the 19-nation monetary union by 0.1 percentage points to 2% and 1.8%, respectively, for this and next year. It expects inflation in the euro area to remain unchanged at 1.7% in the current year and over the next two years.
However, recent data largely supports the ECB's expectation for broad-based economic growth and a gradual rise in inflation, Draghi said. He downplayed the impact of weaknesses in emerging economies such as Turkey, whose central bank sharply raised interest rates to 24% on Thursday to counter inflation.
"Everything that happens in Argentina and Turkey so far shows no significant spillover effects, although there may be significant risks at the individual institution level," Draghi said.
The ECB's optimism "continues to be based on the view that the euro area economy is still above potential, with enough accumulated speeds to fuel inflationary pressures," said Frederik Ducrozet, an economist at Pictet Wealth Management in Geneva.
Analysts say that the ECB is effectively on autopilot and is continuing its protracted plans to leave easy money because its scope is limited: after years of aggressive stimulation, the bank would have difficulty expanding QE next year under the program's current rules ,
Draghi also sought to reassure fears that the new populist government in Italy, his home country, could confront the EU authorities over the budget deficit limit of 3% of the EU blocs.
"The ECB will stick to what the Italian Prime Minister, the Italian Minister of Economic Affairs and the Italian Foreign Ministers have said, namely that Italy will comply with the rules," Draghi said.
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