ECB’s Draghi eases fears of ‘tapering’ stimulus

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FRANKFURT: European Central Bank president Mario Draghi on Thursday shot down speculation that the bank was mulling an end to its massive bond purchases, but offered few clues about future stimulus moves.

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The bank chief dismissed an early October Bloomberg report that the ECB was considering winding down—or tapering—its bond-buying program, known as quantitative easing (QE).

“We didn’t discuss tapering”, he said, describing the article as a “random statement by somebody who didn’t have any clue or information about that”.

He added that the bank’s governing council had not discussed whether to extend the 80-billion-euro-per-month ($87 billion) purchases beyond the current March 2017 deadline.

Draghi pointed to a recent ECB bank lending survey showing that businesses and households were enjoying easier access to credit and more generous repayment terms—saying that his ultra-loose monetary policy of bond buying, historic low interest rates, and cheap loans to banks was being passed on to the real economy.

Without “very substantial” levels of stimulus, he argued, the euro area would not be headed towards the bank’s mandated target of inflation just below 2.0 percent —suggesting that the bank could find it necessary to continue the policies into the future.

“The recovery of the eurozone economy is not weak enough to justify more stimulus but also not strong enough to light-heartedly talk about tapering. This is why the ECB is simply buying time,” said Carsten Brzeski of ING Diba bank.

When it does come time to end QE, Draghi effectively ruled out the prospect of a sudden stop to ECB bond-buying.

“I would say an abrupt ending to bond purchases, I think it’s unlikely,” he said.

Room to maneuver

The ECB’s governing council kept its key interest rates unchanged and made no changes to its monetary policy after a meeting on Thursday, in line with analysts’ expectations that the bank will not take any fresh action before December.

Waiting until then would give the bank time to digest some major events on the political agenda, including the US elections and a crunch referendum on constitutional reform in Italy on which Prime Minister Matteo Renzi has staked his career.

By December, the council will also have the latest economic forecasts from bank staff covering the period until 2019 and the reports of committees that have been asked to explore ways the QE program can be maintained.

“Draghi’s remarks do support our view that in December QE will be extended beyond March 2017,” said Unicredit economist Marco Valli.

Under its own rules, the ECB cannot buy bonds with a yield lower than -0.4 percent, its present historically low deposit rate that means banks must pay to park their money with it.

Neither can it buy too many of any one country’s bonds.

Abandoning either of those rules could leave central banks vulnerable to losing money on some bond purchases or open to accusations of “monetary financing”—paying for government spending by printing money.

But observers have warned that without tweaks to the limits, the ECB will not find enough bonds for sale on the market to meet its monthly quota.

Thursday’s meeting brought little comfort for eurozone banks, who have complained that the ECB’s historic low interest rates are squeezing their profit margins.

The central bank’s headline refinancing rate remained at zero, while banks still have to pay for deposits they make.

“Low rates have worked” to make borrowing easier for households and businesses, Draghi insisted.

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