ECB keeps interest rates at 0%

European Central Bank leaves door open for further cuts as growth and inflation remain sluggish

The European Central Bank has left interest rates in the eurozone unchanged, but kept the door open for more cuts in the months ahead and renewed calls to politicians to do more to support the bloc’s economic recovery.

Amid signs that the UK’s vote to leave the EU is having little immediate impact on the eurozone economy, the ECB held the single currency area’s main interest rate at zero. But ECB president Mario Draghi warned that uncertainty stemming from the vote for Brexit was among the factors dampening the eurozone’s growth and he unveiled a slightly weaker economic outlook for the bloc.

The Frankfurt-based ECB also decided to continue to buy €80bn (£68bn) of bonds a month under its quantitative easing (QE) programme. But it advised markets that the scheme would likely come to an end in just six months. The statement that QE would run until March 2017, “or beyond, if necessary”, disappointed those investors who had hoped for a more explicit extension of QE.

Draghi repeated recent assertions that the ECB stands ready to pump more stimulus into the economy as needed to get inflation back up to its target of below, but close to, 2%. He said interest rates were expected “to remain at present or lower levels for an extended period of time”. Eurozone inflation stands at 0.2%.

Eurozone interest rates are already at a record low after the ECB used its March meeting to launch an unprecedented package of growth-bolstering measures. It cut borrowing costs, expanded its QE programme, and reduced a key bank deposit rate further into negative territory.

Draghi used his latest news conference on Thursday to insist that his support package was “effective” while promising there was more ammunition left to deploy if inflation refuses to budge upwards. “If warranted, we will act by using all the instruments available within our mandate,” he said.

Draghi also said the ECB was looking at ways to ensure “a smooth implementation” of its QE scheme, by which it electronically creates money to buy bonds. However, he said policymakers had not discussed expanding the scheme to buy stocks, and nor had they mulled “helicopter money”, under which central banks print money so that finance ministries can hand it out to citizens or spend it on big infrastructure projects.

The ECB’s outlook for eurozone growth was slightly more pessimistic than when forecasts were last published in June. It now expects GDP to expand by 1.7% this year, compared with 1.6% previously. But for both 2017 and 2018 the growth forecast was trimmed to 1.6% from 1.7%.

The UK’s vote to leave the EU was mentioned only briefly, with Draghi commenting: “The economic recovery in the euro area is expected to be dampened by still subdued foreign demand, partly related to the uncertainties following the UK referendum outcome, the necessary balance sheet adjustments in a number of sectors and a sluggish pace of implementation of structural reforms.”

In a fresh dig at politicians, Draghi said that to reap the full benefits from the ECB’s monetary policy measures, “other policy areas must contribute much more decisively, both at the national and at the European level.” He said that changes to how economies work “need to be substantially stepped up to reduce structural unemployment and boost potential output growth in the euro area”.


Katie Allen

The GuardianTramp

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