Though economy surprises, European Central Bank to stick with stimulus program

Andrew Cummings
June 9, 2017

The 60 billion euros ($67 billion) per month in bond purchases are to run at least through the end of the year.

The euro later pared losses after a Reuters report cited sources as saying the European Central Bank is likely to nudge up its forecasts for economic growth in the euro zone even as it trims its inflation estimates.

"The only change in the statement is that interest rates are now expected "to remain at present levels for an extended period", rather than "at present levels or lower".

The ECB also held its key interest rates steady, and left quantitative easing untouched, disappointing some investors who had expected the central bank to announce a change to asset purchases. He will likely address the monetary policy decisions, as well as Wednesday's sudden takeover of Banco Popular by fellow Spanish lender Santander as part of an ECB-backed plan to prevent Popular from collapsing.

Sources told Reuters last week the European Central Bank will acknowledge the improved economic outlook by removing a reference to "downside risks" in its statement. Net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the asset purchase programme. The statement reiterated that the bond purchases are meant to run at the present rate of EUR60bn per month until the end of December 2017 and beyond if necessary. However, he tempered this view with a downward revision of the bank's inflation projections, based on its view that struggling oil prices will continue to weigh on inflation levels.

That came after the European Union statistics agency Eurostat earlier revised up its estimate of first quarter growth to its fastest rate in two years, saying the economy of the 19-country euro zone expanded by 0.6 per cent quarter-on-quarter and by 1.9 per cent year-on-year.

The ECB cut its inflation outlook for each year through 2019 because of weaker energy costs, while raising its forecasts for economic growth.

That's a sign of greater confidence in the economy, which is growing at a two-year high, confidence that ECB President Mario Draghi echoed in subsequent comments.

The next major test will come in September, when the bank will probably decide whether to continue bond buys beyond this year or start to wind them down, known as tapering. Japan's tertiary industry activity index is projected to bounce back from March's monthly dip of 0.2 percent with a gain of 0.5 percent.

The ECB's boss cited factors such as backward-looking wage negotiations and the high proportion of temporary and part-time work as factors which were dampening underlying inflation. Right now inflation is at 1.4 percent in the year through May. It is also charging banks negative interest of 0.4 percent on excess cash parked at the ECB.

- The yield on 10-year Treasuries rose three basis points to 2.2 percent.

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