ECB prolongs controversial asset purchases | Business| Economy and finance news from a German perspective | DW | 08.12.2016
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ECB prolongs controversial asset purchases

While leaving its key interest rates at historical lows, the European Central Bank has extended its already generous asset-buying program, aiming to boost stubbornly weak inflation and sluggish growth in the eurozone.

The European Central Bank (ECB) on Thursday decided to hold its benchmark refinancing rate at zero, its deposit rate at minus 0.4 percent and the marginal lending rate at 0.25 percent.

More importantly, the central bank announced it would prolong its monetary stimulus to the eurozone economy at least until the end of December 2017. The previous deadline for ending its so-called quantitative easing (QE) program was March 2017.

"From April 2017, the net asset purchases are intended to continue at a monthly pace of 60 billion euros until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim," the ECB's 25-member Governing Council said in a statement.

Massive monetary stimulus

Under its current asset-buying program, the ECB has been spending 80 billion euros ($85 billion) every month on buying eurozone sovereign bonds and coporate debt, so the monthly shot in the arm is to decrease, but will have more installments.

On the face of it, the results of the program seem to be upbeat. Inflation - which has been dangerously low - is now at its highest in more than two years and rising. Eurozone economic growth is shrugging off Britain's decision to leave the European Union, and Germany, the bloc's growth engine, seems to be picking up speed again.

In addition, the collapse of Italy's government this week may actually hasten instead of delay the recapitalization of the country's ailing lenders much to the ECB's relief. It has pointed to weak banks as a key obstacle to tapering - or slowly ending - its asset buys.

But beneath the surface, the outlook is far from comforting. The inflation rise is almost entirely due to past declines in oil prices being knocked out of statistics.

Wage growth has also disappointed, suggesting that companies have cut their inflation expectations. Even consumption, the key driver of growth is not as good as it looks.

What comes next?

The Association of German Chambers of Industry and Commerce (DIHK) said it was unhappy about the ECB's decision to extend its bond-buying scheme by an additional nine months beyond the March 2017 deadline. DIHK foreign trade expert Volker Treier said eurozone member countries' resolve to follow through reforms had already decreased in the past few years. He added sluggish investments across the bloc indicated the crux of the matter was not insufficient financing, "but the lack of attractive economic and political frame conditions" for doing business.

ECB President Mario Draghi told reporters after the governors' meeting that the bank had not talked about winding back its bond-buying program. "Tapering was not discussed today," Draghi said, thus disappointing economists, who had hoped for a hint as to when the program would eventually end.

Draghi predicted that the ECB's own inflation target of little under 2 percent would only be met in 2019 when "inflation should reached 1.7 percent."

According to the central bank's forecasts, eurozone growth will come in at 1.7 percent this year and in 2017, while hitting 1.6 percent in 2018 ad 2019.

uhe/hg (Reuters, dpa, AFP)


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