The European Central Bank has left its interest rates and policy stance unchanged amid predictions that it will soon start signaling a definite exit from its extraordinary stimulus efforts as the economy strengthens in the 19-country eurozone.
The bank’s 25-member governing council did not change its stance that its 30 billion euros ($36 billion) in monthly bond purchases will run at least until September and longer if necessary. The purchases pump newly created money into the economy to raise inflation and growth in the wake of the 19-country eurozone’s crisis over high debt in member states like Italy and Greece.
Analysts are waiting for bank President Mario Draghi’s news conference to see if he will offer any signal about whether the purchases will come to an abrupt end in September or continue, possibly at a slower pace.
The end of the stimulus will eventually have wide-ranging effects for many people. It would mean higher returns on savings accounts, currently negligible due to low market interest rates that result from the bank’s policies. By raising yields on safer assets, the return to more normal monetary policy and interest rates could reduce the relative attractiveness of riskier investments like stocks. Higher long-term rates would make it easier to fund pension plans and other forms of retirement savings.
But higher rates could add to pressure on indebted governments such as Italy, which would have to pay more interest on their borrowings.
The ECB remains far behind the U.S. Federal Reserve, which has already started withdrawing stimulus aimed at overcoming the aftereffects of the financial crisis and the Great Recession. The Fed has ended its own bond purchases and started withdrawing the resulting stimulus by letting its bond holdings shrink as the bonds mature and are paid off. It has also started raising interest rates as the U.S. economy recovered more quickly than Europe did.
Stimulus withdrawal has been much discussed in markets because the eurozone economy is growing strongly. Germany’s Ifo index of business sentiment matched its record high in January, and surveys show business activity is expanding rapidly. The eurozone is expected to have grown 2.4% last year, while unemployment has fallen to 8.7% from a high of 12% in 2013.
Thursday’s statement left unchanged a promise that the bank could even step up the bond purchases if the economic outlook worsens. Such a scenario is now regarded as highly unlikely with growth indicators strong. Analysts who follow the ECB think the governing council might remove that wording as soon as their March 8 meeting to start preparing markets for an eventual end to the purchases.
Draghi is expected to be cautious in his remarks. That is because any hint that the stimulus might face a definite end tends to send the euro’s exchange rate higher against other currencies. And that would keep inflation low by lowering the cost of imports, as well as hurting growth by making eurozone exporters’ goods more expensive abroad. Investors could also start adjusting to expectations of higher central bank interest rate benchmarks by sending market rates higher, prematurely blunting some of the effect of the stimulus.
Draghi has had to resist stimulus skeptics such as German board member Jens Weidmann, who have called for an end to the purchases. In recent weeks several other board members have also made remarks suggesting a stimulus end is on the table. Council members said in a written account of their last meeting that they might revisit their communication — though not necessarily the actual timetable for withdrawal — early this year.
The bond-buying stimulus has driven down long-term interest rates to extremely low levels, making borrowing easier for companies and in theory supporting growth and inflation. Growth has picked up strongly while inflation has lagged at 1.4% annually in December, below the bank’s goal of just under 2% considered best for the economy.
The bank has lowered its benchmark rate that steers short-term market rates to a record low of zero, and has applied a negative interest rate of 0.4% on deposits it takes from banks, a way to encourage banks to lend the money rather than hoard it at the ECB.