FRANKFURT (Reuters) – The European Central Bank kept its key interest rates unchanged on Thursday. It remains on course to end bond purchases this year and raise interest rates next fall, even if protectionist measures around the world weigh on growth.
FILE PHOTO: The logo of the European Central Bank (ECB) is shown on April 26, 2018 in Frankfurt am Main. REUTERS / Kai Pfaffenbach / File Photo
After inflation has recovered and growth has been relatively stable, the ECB has gently softened the incentive for months that a range of risks from protectionism to emerging market turmoil and Brexit will be insufficient to spur growth to prevent Sixth year.
The ECB has made only a nuanced change in its political stance, saying that it will halve its monthly bond purchases from October to 15 billion euros, consolidating its previous language, which only provided for such a move.
But it maintained its position that bond purchases are expected to be completed by the end of the year and interest rates will remain unchanged at least until next summer. Some analysts say that the unusually long horizons for this policy will leave the bank for months as an autopilot.
Attention is now focused on ECB President Mario Draghi's 1230 GMT news conference, which sets out new growth and inflation forecasts and raises questions about growing risks to the outlook. He could also discuss how the ECB will reinvest cash from maturing bonds under its € 2.6 trillion bond purchase program.
But even as economists focus on risk, Draghi will stress that the expansion is solid enough to absorb unused capacity and thus generate inflation, even though it could take years for consumer price growth to return to almost the Bank's target 2 percent returns.
He could also argue that wage growth is improving, further supporting the Bank's expectation that inflation will rise slowly but surely to its destination.
The ECB has been keeping interest rates negative for years, buying more than $ 2.5 trillion in debt, cutting borrowing costs, and driving economic growth after a two-fold recession that nearly wrenched the 19-member bloc.
While the system seems to work, inflation is rising more slowly than previously expected, and much of the ECB's firepower is depleted, leaving only few tools to tackle the next downturn.
Despite Draghi's growth optimism, the bank is likely to reverse some of its predictions after a series of weak summer summits, according to a Reuters survey of economists. Even leading indicators suggest that growth will at best weaken after a weak start to the year.
Draghi will also tackle budget discipline issues in Italy, where a populist government is considering questioning the spending rules of the European Union. Such risk from one of the weakest members of the group has kept bond markets volatile and increased the risk of ongoing turmoil.
However, the new growth forecasts are expected to be only slightly below the June projections, and inflation expectations are largely stable, supported by higher energy costs and slowly increasing wage pressures.
Draghi could also include more details on how the ECB will reinvest funds from maturing debt, although sources close to the discussion said that these decisions will not have a meaningful impact on policymakers, as they are mostly technical steps to avoid them to ensure a smooth process.
With Thursday's decision, the ECB's deposit rate, currently the main interest rate instrument, will remain at -0.40 percent, while the main refinancing rate, which determines borrowing costs in the economy, will remain at zero.
Graphic: Does QE work? – reut.rs/2oyAuen
Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans