The European Central Bank has left its interest rates on hold and maintained its current pace of bond purchases, leaving attention to focus on the message from president Mario Draghi on when and how the central bank may start to pull back.
In its statement (which you can read here), the ECB stuck to its previous line that stimulus will remain in place “until the end of December 2017, or beyond”, and until inflation is on a clear upward path. It remains prepared to do more if the economy takes a turn for the worse, in a move that will upset the governing council’s hawks who think the bank needs to do more to convince markets it is serious about winding down its bond buying spree in 2018.
Mr Draghi is set to meet the press at 1.30pm London time, and he will face questions on the governing council’s plans to remove some of its extraordinary policy stimulus next year.
The ECB chief faces a delicate balancing act between removing some of its stimulus on signs of stronger growth and avoiding spooking financial markets that have grown used to support. Further complicating Mr Draghi’s task is that while the region’s recovery is increasingly strong, inflation remains weak.
Inflation in the region fell to 1.3 per cent in the year to June, down from 1.4 per cent in May and well below the target of just under 2 per cent.
Investors around the world are becoming increasingly jittery as central banks try to return their monetary policies back to normal.
The ECB’s chief’s assessment that his bank had not only defeated inflation, but also that reflationary forces were re-emerging, triggered a spike in the euro and government bond yields as markets interpreted Mr Draghi’s remarks as a signal that the ECB was about to downgrade the QE programme.
The ECB later claimed investors had got it wrong — saying that the speech was meant to reassure people that the bank would keep a lot of stimulus in place until it became clear that the region’s recovery had become self sustaining.
Mr Draghi could stick to the script of his earlier, which were aimed at reassuring markets that the ECB would only begin to remove its stimulus once inflation began to increase.
While improvements in the outlook have been surprisingly strong this year, most on the governing council still think the economy needs the ECB’s support in order to return to full health.