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ECB sticks to easy money as bond-buying squeeze nears
[FRANKFURT] The European Central Bank left interest rates and its mass bond-buying programme unchanged on Thursday, confirming expectations it would play for time as it charts a way out of easy-money policy.
Governors kept the bank's main refinancing rate at 0.0 per cent, the marginal lending rate at 0.25 per cent, and the deposit facility rate at -0.4 percent, meaning banks have to pay to park their cash with the ECB, a spokesman said.
Neither did policymakers adjust the ECB's "quantitative easing" programme of 60 billion euros (S$96.5 billion) per month of government and corporate bond purchases.
Along with low interest rates and cheap loans to banks, the ECB's bond purchases are designed to encourage growth in the 19-nation eurozone, pushing inflation towards its target of just below 2.0 per cent.
As a self-imposed deadline at the end of December approaches, two major factors are squeezing the ECB: a stronger euro and still-sluggish inflation could justify prolonging QE, but it is approaching the legal limits of the scheme and may be forced to wind it down.
The euro rose to just shy of US$1.20 before the announcement, and has since pulled back slightly.
Central bank observers and currency and bond traders will all be watching President Mario Draghi's press conference closely for clues about the bank's next steps, as well as the latest economic forecasts from ECB staff.
While many analysts expect the growth outlook to be upgraded after strong performance in the first half of 2017, inflation expectations are likely to further undershoot the 2.0-per cent target in the coming years.
In June, central bank economists predicted 1.5 per cent inflation this year and 1.3 per cent in 2018 - both already lowered from March's forecasts.
One reason for weak inflation is that the euro has appreciated against other currencies as the recovery gathers pace, braking price growth as imports become cheaper.
"The ECB's press statement seems to confirm that it will not unveil its plans for QE beyond December today," Capital Economics analyst Jennifer McKeown said.
But "since the economy is growing at a fair clip and the bank is approaching limits on its asset holdings, we expect to hear further hints that a taper will come next year," she said.
"Mr Draghi may even indicate that plans will be published in October." - Following July's meeting of the governing council Draghi emphasised the need to be "persistent and patient" in the face of unresponsive inflation, suggesting that an end to QE will be drawn out.
Policymakers still see slack in the eurozone economy, and have pointed to slow wage growth linked to still-high unemployment and underemployment in some member countries as the biggest factor holding back inflation.
Prolonging the ECB's intervention could support growth and inflation for longer, making a smooth withdrawal more certain.