ECB holds rates, bond purchases steady

The European Central Bank left interest rates on hold but left the door open to extending its bond-buying program.

Mario Draghi, President of the European Central Bank. Picture: AFP Photo/Daniel Roland.

European Central Bank President Mario Draghi Thursday left the door open to an extension of his bond-buying program beyond March 2017, as his economists lowered their growth and inflation forecasts for next year only slightly.

Earlier Thursday, the ECB left all of its key interest rates unchanged, holding off on shifting its main policy levers, even as inflation in the 19-country currency bloc remains stubbornly low.

The ECB confirmed that its monthly asset purchases of 80 billion euros ($US90 billion) will run until end of March 2017 or beyond if necessary. And Mr Draghi said work is under way to prepare for changes in the program, should they be needed.

“If warranted, we will act by using all the instruments available within our mandate,” he said. “Our program is effective and we should focus on its implementation.”

Mr Draghi said the eurozone economy had shown continued “resilience” in the face of political uncertainties, including the U.K.’s June vote to leave the European Union.

The central bank’s economists did lower their growth forecast for next year, but only modestly, to 1.6 per cent from 1.7 per cent. They also nudged down their inflation forecast for 2017, to 1.2 per cent from 1.3 per cent.

“For the time being, the changes are not substantial enough to warrant a change in policy,” Mr Draghi said. “There is no question about the will to act, or the ability to do so.”

However, he warned that the eurozone faces “downside risks” that could mean growth is weaker than expected, including the fallout from Brexit.

The most recent data showed inflation at only 0.2 per cent in August. The ECB has missed its inflation target of just below 2 per cent for over three years, and is no closer to attaining it than when it launched the first of a series of stimulus programs in June 2014.

Despite that failure, Mr Draghi issued a defence of the central bank’s stimulus measures, saying they had boosted lending to households and companies, and ended a situation in which borrowers in southern Europe paid higher interest rates than their northern European counterparts.

“While in the previous time we had observed fragmentation and very subdued credit developments, now we can say fragmentation is over and credit is growing constantly,” he said. “I conclude that our policy has been very effective.”

Eurozone inflation has remained well below the central bank’s target, largely because energy prices have fallen over recent years. Policy makers fear that households and businesses will grow used to very low inflation rates and adjust their behaviour accordingly, with workers settling for lower wage rises than in the past and companies reluctant to raise their prices — developments that policy makers refer to as “second round effects.”

“We are monitoring these developments very closely and we stand ready to act if we detect signals that there could be second round effects,” Mr Draghi said. “The case for higher wages is unquestionable.”

Mr Draghi repeated his call for action by eurozone governments to boost growth by undertaking needed overhauls and increasing spending on roads and other infrastructure, highlighting the role Germany could play.

“Countries that have fiscal space should use it,” he said. “Germany has fiscal space.”

He also welcomed a commitment by leaders from the Group of 20 largest economies at their meeting in Hangzhou, China to use new levers to revive global growth.

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