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ECB sticks to stimulus exit plan despite 'uncertainties'

Central bank head Mario Draghi flags rising protectionism as a major source of uncertainty in the global outlook

Frankfurt

EUROPEAN Central Bank (ECB) chief Mario Draghi on Thursday played down risks to the eurozone economy in the face of rising "uncertainties", as the bank stuck to its plan to scale back stimulus this year.

"Uncertainties relating to rising protectionism, vulnerabilities in emerging markets and financial market volatility have gained more prominence recently," Mr Draghi said in Frankfurt. But he added that the ECB remained confident in the "underlying strength" of the euro-area economy.

Bank governors decided earlier to hold interest at record lows until well into 2019, and confirmed their intention to wind down their massive bond purchases to zero by year-end.

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The ECB said it will halve bond purchases to 15 billion euros (S$23.9 billion) a month from October, firming up a previous guidance that it "anticipates" such a move. But it still expects to end its 2.6 trillion euro asset purchase scheme by the end of the year, suggesting that a formal decision on ending quantitative easing will come later. With Thursday's decision, the ECB's rate on bank overnight deposits, which is currently its primary interest rate tool, remains at -0.40 per cent.

Mr Draghi's sangfroid comes despite growing threats on the horizon, from trade spats sparked by US President Donald Trump's "America First" policies to currency crises in Turkey and Argentina and fresh worries about Italian debt. "A major source of uncertainty we see in the global outlook comes from rising protectionism," Mr Draghi said.

Unveiling the ECB's latest growth projections, Mr Draghi said the bank had slightly lowered its forecast for the eurozone for this year and 2019. The bank now expects growth of 2.0 per cent in 2018 and 1.8 per cent in 2019, down from 2.1 and 1.9 per cent in previous staff projections. The outlook for 2020 remained unchanged at 1.7 per cent.

The bank continues to expect inflation to hit 1.7 per cent from 2018 to 2020. "The unanimous view of the Governing Council was that the present monetary policy stance is robust," he said. "Significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term."

One potential overseas threat to the eurozone economy took a surprise turn on Thursday. Turkey's central bank raised its benchmark interest rate by 625 basis points to 24 per cent. In doing so, it rebuffed his call for lower borrowing costs made just two hours before the decision was announced.

The Bank of England upgraded its view of the economy but reiterated that uncertainty about Britain's future after it leaves the European Union (EU) has increased. The Monetary Policy Committee voted unanimously to hold the benchmark rate at 0.75 per cent, after hiking at the last gathering in early August.

Mr Draghi was asked about the risks emanating from his native Italy, where the populist government is preparing a budget that could break EU rules, and where local media have reported that Finance Minister Giovanni Tria might resign.

"Words in the past few months have changed many times - what we are now waiting for is facts," he replied. "We have to be aware that the Italian prime minister, the Italian minister of the economy, and the Italian minister for foreign affairs" have "all said that Italy is going to respect the rules." AFP, BLOOMBERG