The European Central Bank has left interest rates and massive support for the eurozone economy unchanged, despite sharp upgrades to the bank's growth forecasts. But inflation will remain stubbornly low, the ECB says.
The European Central Bank (ECB) on Thursday significantly lifted its eurozone growth forecasts for the coming years, as well as unveiling its first estimate for 2020.
The Frankfurt, Germany-based institution now expects growth of 2.4 percent in 2017, 2.3 percent in 2018 and 1.9 percent in 2019. In its previous projections back in September, the bank had predicted growth of 2.2, 1.8 and 1.7 percent respectively. For 2020, the ECB is penciling in growth of 1.7 percent.
ECB President Mario Draghi told a news conference that the eurozone was benefitting from a "broad-based global expansion" along with buoyant financial market conditions that had been supported by years of central bank stimulus. He added that the risks to the upswing in the eurozone economy were broadly balanced.
"On the one hand, the strong cyclical momentum, underpinned by continued positive developments in sentiment indicators, could lead to further positive growth surprises in the near term. On the other hand, downside risks continue to relate primarily to global factors and developments in foreign exchange markets," he said.
Inflation still too weak
Yet, while eurozone growth has accelerated in recent months — racking up 0.6 percent quarter-on-quarter between July and September — inflation remains stubbornly short of the ECB target of just below 2.0 percent.
In its latest inflation forecast, the ECB expects eurozone prices to go up by just 1.4 percent in 2018, and rising slowly to 1.5 percent in 2019 and 1.7 percent in 2020. That is why the ECB president expects eurozone interest rates to remain at present levels "for an extended period of time."
"An ample degree of monetary stimulus . . . remains necessary for underlying inflation pressures to continue to build up," Draghi added.
As a result, policymakers decided to keep monetary policy accommodative, leaving the benchmark main refinancing rate at zero percent. The deposit rate will also remain unchanged at minus 0.4 percent, in effect imposing a levy of the same amount on a portion of reserves parked by lenders from the private sector at eurozone central banks.
Cash injections to stay
As expected, policymakers also announced no changes to the ECB's huge asset-buying scheme after they already agreed in October to halve monthly purchases from January as the eurozone economy powers ahead. The ECB slashed its bond-buying program — also known as quantitative easing (QE) — from €60 billion ($71 billion) per month to €30 billion from January.
"The governing council confirms that from January 2018 it intends to continue to make net asset purchases...at a monthly pace of €30 billion, until the end of September 2018, or beyond, if necessary," the bank said in a statement.
The government and corporate bond purchases, along with ultra-low interest rates and cheap loans to banks, are designed to pump cash through the financial system and into the real economy of businesses and households, bolstering economic growth and inflation.
uhe/aos (Reuters, dpa, AFP)