2018-06-28 09:31:53
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.