European Central Bank keeps stimulus measures on track
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FRANKFURT — With the eurozone economy showing strong growth, the European Central Bank left its interest rates and stimulus measures unchanged Thursday as it looks ahead to the delicate matter of ending its bond-purchase program next year.
The Bank of England also left its key rate unchanged at 0.5
Together, Thursday's decisions show how the eurozone and Britain are moving more slowly than the U.S. Federal Reserve as the world's leading central banks start to gingerly withdraw the massive stimulus measures they deployed against the 2007-2009 financial crisis and the subsequent Great Recession.
The Fed on Wednesday raised its benchmark federal funds rate by a quarter-point to 1.25-1.50
Growth has been robust in the U.S. and stronger than expected in Europe, but the stimulus withdrawal has moved slowly. That's because inflation in Europe and the U.S. remains lower than many would like. And central bankers are leery of startling financial markets that have been supported for years by the steady introduction of newly printed money into the financial system through bond purchases.
The ECB has tried to reassure markets that its stimulus efforts will be withdrawn slowly so as not to disrupt the economic recovery that saw the economy in the 19 countries that use the euro expand 2.6
The bank's 25-member governing council left its key benchmark for lending to banks unchanged at zero. The rate on deposits it takes from commercial banks remained at minus 0.4
The bank raised its forecasts for inflation and growth as Draghi expressed "increasing confidence" that inflation will eventually turn up toward the goal of close to but below 2
The bank raised its prediction for growth next year to 2.3
But the projection for 2020 was somewhat low, at 1.7
The ECB is trying to reassure markets that the stimulus will only be withdrawn slowly. Its statements include a promise that interests rates will not rise until "well past" the end of the bond purchases. That would mean that the extraordinarily low benchmarks would remain in place until well into 2019.
Rock-bottom rates and the bond-buying stimulus have meant unusually low market interest rates for government and corporate borrowers. A 10-year German government bond yields around 0.33
On the other side of the ledger, the low rate environment has meant paltry or nonexistent returns for savers on conservative holdings such as bank deposits. Low rates have also squeezed bank profits by compressing the difference between their lending and borrowing rates. And the zero rate interest rate policy has also raised concerns that it may be driving unsustainable increases, or bubbles, in some asset classes, as investors take more risks to hunt for yield. So far, stock markets have shrugged off the stimulus withdrawal; major stock indexes such as Germanys' DAX and the U.S. Dow and Standard & Poor's 500 have hit record highs this year.
The ECB warned Nov. 29 that a key hazard for the economy in the months ahead is the "risk of a rapid repricing in global markets."