ECB maintains bond-buying plan

The European Central Bank (ECB) on Thursday left key interest rates and its mass bond-buying program unchanged, in line with analysts' predictions.  

Interest on the bank's main refinancing operations stood at 0.0 percent, on its marginal lending facility at 0.25 percent and on deposits at -0.4 percent, meaning banks pay to park money with the ECB.

The decision was announced after a regular meeting of the bank's 25-member policy council at its headquarters in Frankfurt, Germany. The ECB even left the door open to more asset buys if the economic outlook worsens.

At a post-policy meeting press conference, ECB President Mario Draghi said, "we need to be persistent and patient because we aren't there yet," with regard to any potential changes to the bank's asset purchase program.

"We also were unanimous in communicating no change to the forward guidance and also we were unanimous in setting no precise date for when to discuss changes in the future - in other words, we simply said that our discussions should take place in ... the autumn," he added.

Having raised the prospect of policy tightening last month, Thursday's inaction was likely to signal that any policy tweaks would come only slowly and gradually, likely taking years to wean the European economy off monetary support.

Remaining cautious

Most market participants expected the ECB to play something of a balancing act, keeping the course toward tightening steady while trying to avoid triggering serious market volatility.

In the run up to Thursday's meeting, anticipation had built up that the ECB would signal a shift in its "quantitative easing" (QE) massive bond-buying activity. As part of this program, designed to pump cash into the economy to stimulate growth, the ECB is currently purchasing 60 billion euros worth of government and corporate bonds every month.

Market expectations were boosted when ECB President Draghi opened the door to policy tweaks in a speech in Sintra, Portugal, last month that was viewed as unexpectedly hawkish, sending the euro and government bond yields rallying.

But the key wording in the bank's statement on Thursday was left unchanged, underlining its unwillingness to roil markets with premature signals about an exit from its stimulus efforts as the economy recovers.

While the bank is currently not under pressure to make a call on the future of asset buys, they are now set to run until the end of the year. So by September, or October at the latest, policymakers have to decide whether to extend the buys or wind them down in a process called tapering.

The ECB could also soon reach technical limits to its bond buying that will make the already controversial program even more difficult to continue much beyond the present cut-off point in December. ECB policymakers may prefer not to put an end date on the buys or a schedule on tapering, maintaining flexibility and avoiding a perception that it was on a preset course.

Inflation sluggish

Justifying an end to QE on inflation data alone will be difficult, as eurozone prices grew just 1.3 percent in June - well short of the ECB target of just below 2.0 percent. Central bank forecasts include inflation of 1.5 percent this year and just 1.3 percent in 2018.

Although inflation is still sluggish, economic growth in the 19-nation eurozone has picked up strongly enough to dispel the fears of deflation that had prompted policymakers to launch the QE scheme. So the ECB has to resolve this apparent disconnect between weak inflation and improving growth.

Investors worldwide will remain on high alert for signals from the ECB about any potential changes to its policies. But any observers looking for interest rates to rise from their historic lows likely have a long wait ahead, analysts say.

The ECB has for many months stated that rates will only start to rise "well after the horizon of net asset purchases" has come to an end. The bond-buying program itself might not be completely wound down until far into 2018, while low inflation expectations stretching into 2019 would make it difficult to justify higher rates.

sri/jbh (Reuters, AFP, AP)