The European Central Bank has held interest rates unchanged as Mario Draghi prepares to present policymakers’ latest thinking on how they plan to end their €2tn quantitative easing bond-buying programme.
The governing council opted to keep the bank’s main refinancing rate at a historical low of zero. It also left its deposit rate at minus 0.4 per cent, in effect imposing a levy on lenders’ deposits parked at the region’s central banks.
The central bank council started discussions in Frankfurt on Wednesday evening on winding down its €60bn-a-month quantitative easing programme in 2018. The bank is widely expected to begin tapering QE from January, following improvements in the eurozone economy and amid fears that eurozone central bankers will run out of assets to buy.
A final decision on how to taper QE is not expected until October but the bank is starting to examine options for ending the asset purchases. Mr Draghi will meet the press at 1.30pm UK time on Thursday.
The QE programme, which started early in 2015, is widely credited with reviving growth in the region and blunting the threat of deflation. A new estimate of euro area growth published by the EU statistics agency on Thursday showed that the region’s economy expanded by 2.3 per cent in the year to June — a higher figure than originally thought.
However inflation is just 1.5 per cent, below the ECB’s target of almost 2 per cent. The appreciation of the euro is complicating the ECB’s exit from its crisis-era monetary polices, including QE, by reducing imported inflation and putting the region’s exporters at risk of falling sales.
A fresh round of economic forecasts is expected to show inflation weakening in 2018, in part because of the strong euro.
Few think that this will dissuade the ECB from tapering, though markets are betting increasingly that the central bank will wait until 2019 to raise interest rates.
The euro edged up to $1.196 ahead of the decision and has recently traded at $1.20 — its highest level since QE began. Investors are split on whether the ECB president will try to talk the euro down during Thursday’s press conference.
Mr Draghi will reveal the new economic forecasts for growth and inflation shortly after the press conference. Projections from June showed growth hitting 1.9 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019. Inflation was expected to hit 1.5 per cent this year, 1.3 per cent in 2018 and 1.6 per cent the following year.