ECB hints at end to easy money policy

By Kim Yon-se
  • Published : Jun 8, 2017 - 21:49
  • Updated : Jun 8, 2017 - 21:50

The European Central Bank on Thursday signalled greater confidence in the eurozone economy, as it took what analysts describe as a tentative step towards an exit from its easy-money policy.

Policymakers meeting in Estonian capital Tallinn decided to keep the bank's main refinancing rate at 0.0 percent, the marginal lending rate at 0.25 percent, and the deposit rate at -0.4 percent -- meaning lenders have to pay to park cash with the central bank -- a spokesman said.

But they also dropped a long-standing commitment to dropping rates yet further if necessary, indicating central bankers see reduced risk of economic shocks to the 19-nation single currency area.

Rates will "remain at their present levels for an extended period of time," the spokesman said.

The change in the bank's stance was widely expected among analysts, who believe it could be the first step towards the bank winding down its 60-billion-euro ($67.4 billion) per month bond-buying programme next year.

Governing council members made no change to language suggesting that they could increase the pace of asset purchases if necessary to stimulate the eurozone economy.

Bond-buying and low interest rates were introduced at a time when the ECB feared deflation -- or steadily decreasing prices that undermine economic activity.

By pumping cash through the financial system and into the real economy, the bank believes it has stimulated growth and pushed inflation back towards its target of just below 2.0 percent.

Inflation has been on a rollercoaster ride in recent months, hitting the 2.0 percent target in February before falling back again in March.

The same pattern was repeated with a spike in April, to 1.9 percent, before a retreat in May.

Volatile food and energy prices are to blame for such rapid changes, policymakers say, while "core", or underlying inflation discounting those elements remains sluggish.

ECB president Mario Draghi argues wages -- which he dubs the "linchpin" of price growth -- are not rising fast enough to drive inflation.

At a press conference later Thursday, the central bank chief will present the latest ECB staff forecasts, widely expected to predict faster growth but slower inflation than previously thought in the coming years.

"Draghi is likely to highlight the continued weakness of core inflation and state that the pick-up in wage growth that the bank is looking for has still not come about," economist Jennifer McKeown of Capital Economics said. (AFP)