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The bank s expectation that interest rates will stay put for a year surprises
markets
IN THESE times of extraordinarily low interest rates and tentative tightening,
central-bank watchers have turned reading between the lines of monetary
policymakers statements into an art form. Before the meeting of the European
Central Bank (ECB) on June 14th, many were preparing to decipher a subtly coded
message on the future of euro-zone monetary policy.
In the event, the bank was much clearer than anticipated. It expects to wind
down its asset-purchase programme also known as quantitative easing , or QE.
It will halve its monthly purchases to 15bn ($17bn) between September and
December, before ceasing them altogether. It also expects that interest rates
will stay where they are (zero for the benchmark refinancing rate; -0.4% for
banks deposits at the ECB) at least through the summer of 2019 , if not
later. Mario Draghi, the bank s president, stressed that the guidance on both
QE and interest rates depends on events, leaving the bank room to change course
if it thinks fit.
The tapering of QE is a sign that the ECB sees inflation as being on a
sustainable path. Consumer-price inflation rose to 1.9% in May in line with the
bank s target of 2% or just below. Much of the increase reflects a rise in oil
prices, but the bank is placing more weight on signs of a pickup in domestic
costs, including wages. Although GDP growth drooped in the first quarter of
2018 to 0.4%, from 0.7% in each of the previous five quarters, the bank
believes that the latest indicators still point to a solid rate of expansion.
Most economists were expecting the asset-purchase programme to be wound down,
but the guidance on interest rates came as a surprise. The euro fell by over 1%
against the dollar on the announcement. The consensus view had been that the
ECB would raise rates in the second quarter of 2019. Now it appears that there
is a chance that rates might not rise before Mr Draghi s term ends in October
next year.
In reality, though, the announcement holds something for both hawks and doves.
Some member states, notably Germany, are worried that their economies will
start overheating, and have been agitating for tighter policy for a while.
Others, where there is more evidence of spare capacity, have been less keen.
The global economic outlook has also become less certain. Although Mr Draghi
said the direct impact of America s steel and aluminium tariffs would be
limited, an escalating trade war could have significant effects.
And only last month, political uncertainty in Italy was upsetting financial
markets. Mr Draghi said little about his home country, except to note that
volatility had dropped back and that he had seen no significant signs of
contagion. But those worried about the risks can draw comfort from the
expectation that interest rates will be unchanged for a year or more. With that
careful compromise, Mr Draghi has shown once again that he will be a hard act
to follow.