ECB rules out further rate cuts

The European Central Bank signalled on Thursday it planned no further interest rate cuts as euro zone prospects improved, but said subdued inflation meant it would continue to pump more stimulus into the region's economy.

Decision seen as a sign central bank moving closer to exit from its stimulus programme

BRUSSELS • The European Central Bank (ECB) has ruled out further interest rate cuts in a sign that it is moving closer to an exit from its stimulus programme.

The Governing Council, meeting yesterday, dropped its guidance that rates might fall further, saying only that it now expects borrowing costs to stay at present levels for an extended period.

In a press conference following the decision, ECB president Mario Draghi dropped a long-standing reference to "downside risks" to the euro zone's economic outlook from his policy message, saying instead that risks are now "broadly balanced". He added that inflation remains subdued.

Policymakers also reiterated their pledge to increase the size or duration of the bond-buying programme if the economy deteriorates.

"So far, measures of underlying inflation continue to be subdued. Therefore a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term," Mr Draghi said.

The deposit rate was kept unchanged at minus 0.4 per cent and the main refinancing rate at zero, and officials still intend to buy €60 billion (S$93 billion) of debt monthly until at least the end of the year. The ECB left its aggressive stimulus unchanged, including its €2.3 trillion bond-buying programme, despite resistance from cash-rich Germany.

The euro fluctuated after the decision, dropping to US$1.12165 from US$1.1241 following the statement. It was trading at 1.554 against the Singdollar. European stocks were little changed.

Data by statistics agency Eurostat released yesterday showed euro zone gross domestic product rose 0.6 per cent in the first quarter, stronger than initially estimated. On an annualised basis, the economy expanded 2.3 per cent in the January-March period, outstripping the United States' 1.2 per cent.

The ECB raised its growth forecasts for the next three years, noting that the euro zone economy is surfing on a momentum that "increases the chances of stronger than expected economic upswing".

The euro zone economy is now expected to expand by 1.9 per cent in 2017, 1.8 per cent in 2018 and 1.7 per cent in 2019, the bank said, raising all three forecasts by 0.1 percentage point.

"Downside risks, mainly related to global macroeconomic developments, continue to exist," Mr Draghi said.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on June 09, 2017, with the headline 'ECB rules out further rate cuts'. Print Edition | Subscribe