European Central Bank President Mario Draghi said on Thursday the bank was looking at options to ensure it could pursue its unprecedented money-printing programme, with eurozone inflation still way below its official target.
However the bank stopped short of confirming a specific extension of its €80bn monthly asset purchases, reaffirming its existing line that they would continue until next March or beyond if necessary.
“The Governing Council tasked the relevant committees (with the ECB) to evaluate the options that ensure a smooth implementation of our purchase programme,” he told a news conference after the policy-making council kept its key interest rates on hold.
Draghi unveiled a modest downgrade of the bank’s euro zone growth forecasts warned of downside risks, among them Brexit-related uncertainty, but said no action was required for now.
“For the time being, the changes are not substantial to warrant a decision to act. We see that our monetary policy is effective,” he said.
The ECB kept its deposit rate at -0.4 per cent, charging banks for parking cash overnight, and held the main refinancing rate, which determines the cost of credit in the economy, unchanged at 0.00 percent.
The euro hit a two-week high, bond yields across the eurozone rose and stock markets in the region fell on his confirmation that an extension of the central bank’s asset-purchase programme was not discussed at the meeting.
Keeping rates deep in negative territory and printing money at a record pace, the ECB is hoping to revive inflation and growth in a region weighed down by nearly a decade of economic malaise and crises.
After 18 consecutive months of buying government bonds to pump up the economy and raise inflation, the European Central Bank’s holdings hit a landmark €1tn last week — yet prices are seen rising a mere 0.2 per cent this year, well below its target of near two percent.
WHAT TO CHANGE
Prolonging the purchases is controversial because it risks further distorting market prices and even running out of eligible bonds. The ECB has already had to stop purchases in Estonia and found no bonds to buy in Luxembourg last month.
That has led to increasing speculation that it will have to adapt the rules of its asset purchase programme to provide even more stimulus, as it is widely expected to do before year-end.
The choice is then between tweaking purchase rules or going for a bigger redesign.
Easiest options could include buying bonds yielding less than the bank’s -0.4 per cent deposit rate, extending the maturity range of eligible bonds to 30 years from 20 years and buying an even bigger portion of certain bond issues.
Bigger changes could involve the purchase of new types of assets, like bank bonds, non performing loans or in the extreme case, stocks.
Still, each of these changes would generate concern or even outright opposition from the hawks and the growing camp of moderates on the Governing Council, who worry about the unintended negative effects of the ECB‘s extraordinary stimulus.
The ECB slightly upgraded its euro zone growth forecast to 1.7 per cent from 1.6 per cent this year, but downgraded it to 1.6 per cent from 1.7 per cent for both 2017 and 2018. Its forecast for a modest takeoff in inflation to 1.2 per cent next year and 1.6 per cent in 2018 were barely changed.
Draghi had his usual stern words to say on the structural reform efforts of the region’s governments, describing them as in need to be “substantially stepped up” to raise productivity, improve the business environment, and boost infrastructure.
“Fiscal policies should also support the economic recovery,” he said, repeating a message made by central bankers at the annual Jackson Hole gathering this year but which has seen only little take-up so far in Europe.