Interest Rates Held Steady by the ECB Despite Strong Performance in the Eurozone

By World Economic Forum [CC BY-SA 2.0] via Wikimedia Commons

The European Central Bank has interest rates held steady and signalled that it would keep up its aggressive monetary despite data revealing strong economic performance in the region.

The ECB verified that from January, it aimed to slow its bond-buying efforts to a rate of €30bn (£22bn) at least until the end the third quarter next year.

The bank maintained its main interest rate at 0.0pc and increased its forecast for GDP growth this year by two percentage points to 2.4pc.

Talking at a press conference after the meeting of the central bank’s council, Mario Draghi, the ECB president, said that there was a significant change from discussing recovery to talking regarding expansion.

Draghi said that positive news regarding the momentum of Eurozone growth meant that the bank’s council had “increasing confidence” that inflation would eventually strengthen in long-term and become “self-sustaining.” However, he added that current policy must be maintained in order to “sustain inflation” towards the target of the ECB of below, and close to 2pc.

Responding to implications that the bond-buying programme and sustained low-interest rates risked limiting the room for manoeuvre of the central bank in the event of a downturn, Draghi said that a slump was an “even more remote possibility than it would have been a year ago.”

Staff of ECB predicted that inflation would hit 1.4pc in 2018, increasing to 1.7pc in 2020. GDP will rise 2.3pc in 2018, an upgrade of 0.5 percentage points. However, it said that it would slow to 1.6pc by 2020.

According to Claus Vistesen of Pantheon Macroeconomics, this revealed a governing council that was “still not willing” to translate a strong outlook on growth into a higher forecast for core inflation.

Vistesen said that he was concerned that “this message of strong growth and subdued inflation will turn out to be inconsistent.” Vistesen added that “growth will slow slightly next year.” However, inflation will continue to edge higher.

It arrived as the Eurozone Purchasing Managers’ Index that is produced by IHS Markit reached 58, surpassing the predictions of most economists, and reaching its highest level ever since February 2011. Any score more than 50 indicates growth.

This did not stop Draghi from warning that inflation was still suffering from the effect of the sluggish wage growth, which was currently “way, way slower than in [recoveries following recessions in] the past.”.

Draghi added that this meant that there was “caution” among the staff of the ECB and its governing council when it came to disclosing “bold statements” on inflation.