Bank Hints at Extending Bond Purchase Plan
Eurozone economies continue to face a challenging economic environment after its central bank cut its growth forecast and indicated the continuation of its bond-buying program. In its policy statement, the European Central Bank (ECB) announced no change in its target interest rates, while confirming that its monthly asset purchases of €80.0 billion ($90.0 billion) will run until at least the end of March 2017.
“The Governing Council confirms that the monthly asset purchases of €80.o billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim,” the ECB said in a statement on its web site. (Source: “Monetary policy decisions,” European Central Bank, September 8, 2016.)
The eurozone’s central bank kept its deposit rate at -0.4%, charging banks for parking cash overnight, and held the main refinancing rate, which determines the cost of credit in the economy, unchanged at zero percent.
The central bank’s economists have lowered their growth forecast for next year to 1.6% from 1.7%, and have lowered their inflation forecast for 2017, to 1.2% from 1.3%, suggesting that the reversal in the ECB rate policy is unlikely to come soon, because the economic bloc is facing substantial headwinds after Britain’s decision to leave the European Union (EU).
ECB President Mario Draghi said in a press conference that he was ready to provide more stimulus if the economy didn’t respond to the bank’s monetary measures. “If warranted, we will act by using all the instruments available within our mandate,” said Draghi, warning that the eurozone faces “downside risks,” especially from the fallout of Brexit, which could push growth lower. (Source: “European Central Bank Leaves Rates Unchanged, Door Open on Bond-Buying,” The Wall Street Journal, September 8, 2016.)
With weakening growth and inflation, the ECB is buying €1.74-trillion-worth of bonds, and is keeping rates in negative territory to fuel growth with cheap credit to end the bloc’s decade-old slow-growth environment. (Source: “ECB hints at stimulus but keeps markets guessing,” Reuters, September 8, 2016.)
“We are monitoring these developments very closely and we stand ready to act if we detect signals that there could be second-round effects,” said Draghi. “The case for higher wages is unquestionable.” (Source: The Wall Street Journal, op cit.)
The European Central bank’s massive bond purchase program is controversial in Europe because the policy of more free credit and money-printing risks creating distortions in the market prices.