ECB lifts growth forecasts, holds rates

It predicts inflation to stay below target, sticks to stimulus pledge

FRANKFURT • The European Central Bank yesterday raised growth and inflation forecasts for the euro area but stuck to its pledge to provide stimulus for as long as needed, predicting inflation would remain below target into 2020.

The ECB kept its key rates on hold and also held rigidly to its script on its intentions for next year - despite pressure from some policymakers to acknowledge explicitly the strength of the euro zone recovery and more closely follow the US Federal Reserve's tightening trend.

Base interest rate will remain at zero while the marginal lending rate and deposit rate stayed at 0.25 per cent and minus 0.4 per cent respectively.

Separately, the Bank of England (BOE) also kept its key interest rate unchanged at 0.5 per cent at its final meeting of the year, it said yesterday while keeping an eye on Britain's Brexit-fuelled inflation.

The BOE sat tight at the meeting on Wednesday after lifting the rate in November for the first time in a decade, from a record-low 0.25 per cent, faced with high inflation that could see the central bank lift borrowing costs further next year, according to analysts.

The euro rose to a day high of US$1.186 after the ECB raised its growth forecasts from this year through to 2019. Inflation, however, was predicted at just 1.7 per cent in 2020 - short of its official target of close to 2 per cent - despite a modest upgrade of price expectations.

"All in all, the revision of the macroeconomic projections is going in the right direction," ECB president Mario Draghi told a news conference, noting that subdued wage growth suggested an "ample" degree of stimulus was still required.

In a nuanced message, he nonetheless added that he was more confident than two months ago that the inflation target could be reached and said he saw no negative effect from the US Fed's tightening, with its latest rate hike announced on Wednesday.

Six weeks after agreeing to halve asset buys from January, the ECB reiterated its commitment to continue bond purchases at least until the end of September, and to keep reinvesting cash from maturing debt until much later to support a rebound in growth and inflation.

Having faced five years of anaemic inflation, the ECB has deployed its entire policy arsenal, cutting rates into negative territory, giving banks cheap loans and hoovering up bonds with an unprecedented €2.55 trillion (S$4 trillion) of purchases.

Its work has paid off as the euro zone recovery is now well into its fifth year, thanks to nine million new jobs, letting policymakers curb stimulus from next year and raising the prospect that the lavish bond buys it started in early 2015 could finally end.

REUTERS, AGENCE FRANCE-PRESSE

A version of this article appeared in the print edition of The Straits Times on December 15, 2017, with the headline 'ECB lifts growth forecasts, holds rates'. Print Edition | Subscribe