ECB holds rates, seen charting course to more easing in December

The headquarters of the European Central Bank (ECB) in Frankfurt, Germany.
The headquarters of the European Central Bank (ECB) in Frankfurt, Germany. PHOTO: REUTERS

FRANKFURT (REUTERS) - The European Central Bank kept interest rates and policy guidance unchanged on Thursday but may lay the groundwork for more easing to come in December as it tries to sustain a long-awaited rebound in consumer prices.

Holding interest rates deep in negative territory and maintaining bond purchases at 80 billion euros (S$121.7 billion) per month, ECB President Mario Draghi is likely to emphasise later at a news conference the continued need for monetary stimulus, reinforcing expectations for an extension of the ECB's asset buys beyond its scheduled end next March.

The ECB has provided unprecedented stimulus for years with sub-zero rates, free loans to banks and over a trillion euros in bond purchases, all in the hope of reviving growth and lifting inflation back to its target of just below 2 per cent after more than three years of misses.

In a widely expected decision on Thursday, Mr Draghi kept the deposit rate at minus 0.4 per cent and maintained the ECB's guidance for rates to stay at their current or lower levels for an extended period.

The trick for Mr Draghi will be to keep the door firmly open to more stimulus without any hint of commitment that could rattle markets and lead to a repeat of turbulence set off last year, when the ECB raised expectations too high and did not fully deliver on them.

Action is far from urgent, however. The euro zone economy is chugging along, inflation is at a two-year high, national budget proposals suggest a bit more fiscal support, and the early impact on euro zone economies of Britain's decision to leave the European Union has been muted. All these suggest that the 19-country bloc is on the path predicted by the ECB in September.

But Mr Draghi and fellow board members have gone to pains in recent weeks to emphasize that this outlook is predicated on"very substantial" monetary support, a hint taken as confirmation that an extension is coming.

Indeed, ECB chief economist Peter Praet has warned that a premature withdrawal of stimulus would stall and reverse the upswing, a further sign any tapering is well into the future. "Present loose (financial) conditions also reflect expectations of additional ECB action, this suggests that the ECB will have to do more just to preserve the current degree of accommodation," UniCredit economist Marco Valli said prior to the rate decision. "Therefore, anything less than quantitative easing extension at 80 billion euros per month risks tightening financial conditions via higher yields, a stronger currency and, possibly, lower risk appetite." The ECB's 1.74 trillion euro quantitative easing (QE) scheme is now set to expire in March but the bank has always said that it would run until it saw a sustained recovery in inflation.