European central bank maintains stimulus as growth picks up speed

With growth slowly picking up pace, the European Central Bank kept rates deep in negative territory and asset buys at a record pace.
With growth slowly picking up pace, the European Central Bank kept rates deep in negative territory and asset buys at a record pace.PHOTO: EPA

FRANKFURT (REUTERS) - The European Central Bank kept its super-easy monetary policy unchanged as expected on Thursday, maintaining extraordinary stimulus to aid a tepid recovery in growth after nearly a decade in the doldrums.

With growth slowly picking up pace, the ECB kept rates deep in negative territory and asset buys at a record pace, likely arguing that the recovery is not yet self sustaining and underlying inflation is still too low.

The bank's governing council voted to hold the benchmark refinancing rate at zero per cent and the deposit facility rate at minus 0.40 per cent.

Repeating its standard guidance, the bank said rates would stay at their current or lower levels for an extended period and it was also ready to increase or extend it bond purchases if the outlook worsens.

"If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration," the ECB said in a statement.

Attention now turns to ECB President Mario Draghi's news conference, where he is expected to acknowledge that the growth outlook has improved but will highlight ample risks and argue that turning down the taps now is inappropriate.

The recovery still relies heavily on ECB stimulus and markets could become more volatile as the Federal Reserve gradually raises rates, underscoring diverging policy paths between Europe and the US.

"Draghi seems to be comfortable to allow inflation to drift higher before declaring full victory over deflation," David Kohl an economist at Swiss private bank Julius Baer, said before the decision.

On the face of it, Mr Draghi should be relaxed. Inflation hit a three year high last month, manufacturing activity is accelerating and confidence indicators are firming, all pointing to solid growth at the end of last year.

Indeed, euro zone business growth was the fastest in more than five years in December, order books are surging on export demand, and consumption is holding up, despite rising energy costs, all pointing to the sort of resilience not seen since before the bloc's debt crisis.

The underlying picture is mixed, however, giving Mr Draghi plenty of arguments to bat back criticism, particularly from Germany, the bloc's biggest economy and the ECB's top policy foe.

Inflation is still just half of the bank's 2 per cent target and the jump is mostly down to higher oil prices while underlying price growth remains dangerously weak.

The market euphoria after Donald Trump's surprising US election win is also yet to be backed up concrete policy action and the threat of more protectionist policies from the United States and possibly Britain could reverse market sentiment.