ECB unexpectedly dials back stimulus pledge as economy improves

[FRANKFURT] The European Central Bank unexpectedly dropped its pledge to expand its monthly bond purchases if needed, signaling its confidence in the euro area economy's ability to reignite inflation.

Policy makers meeting in Frankfurt said quantitative easing will continue at the pace of 30 billion euros (S$48.9 billion) until at least the end of September, but left out the so-called easing bias that the plan could be increased in "size and/or duration" if the inflation outlook deteriorates. They will keep buying until they are satisfied that consumer-price growth is back on track toward the goal of just under 2 per cent.

The Governing Council also kept interest rates unchanged and repeated its expectation that borrowing costs will stay at present levels until well past the end of net purchases.

The euro rose as much as half a cent, and traded up 0.1 per cent at US$1.2421 at 2.09 pm.

The shift in tone suggests that officials who want to set a more definite course toward the exit after four years of extraordinary stimulus are getting the upper hand in the 25-member Governing Council. That evolving sentiment comes as a surprise for economists who predicted no change in forward guidance amid newly emerged risks to the outlook.

"This is the first natural step toward normalization," said Piet PH Christiansen, an economist at Danske Bank A/S in Copenhagen. "It's a smart move because it also keeps the possibility of extension or tapering beyond September." The new language may overshadow a host of other topics complicating the ECB's task.

US President Donald Trump's plan to impose tariffs on foreign steel and aluminum set off retaliatory threats, raising the specter of a global trade war. An anti-establishment surge in Italian elections put a question mark over the political outlook for one of the euro area's biggest and most-indebted economies. In addition, recent surveys indicate that the upswing in the 19-nation bloc may be hitting a speed bump.

The ECB is also enmeshed in a burgeoning scandal in Latvia that led to the brief detention of the central-bank governor on suspicion of corruption and to the closure of a bank accused of having ties to North Korea. Governing Council member Ilmars Rimsevics didn't attend the meeting as his bail terms forbid him from leaving Latvia, and a request for permission to travel to Frankfurt went unanswered. His deputy Zoja Razmusa was there in his place.

BLOOMBERG