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European Central Bank Leaves Rates, Stimulus Plans Unchanged

European Central Bank Leaves Rates, Stimulus Plans Unchanged

Thursday, 14 December 2017 09:39 AM

FRANKFURT, Germany (AP) — 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.

Investors are now waiting for President Mario Draghi's news conference for clues about when and how the bond stimulus might end. The bank decided in October to reduce the purchases to 30 billion euros ($35 billion) a month from 60 billion euros and to extend them at least until September, or longer if necessary.

The Bank of England also left rates unchanged on Thursday amid uncertainty about how Britain's departure from the European Union, expected in March, 2019, will affect the economy.

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 percent and signaled that three more hikes could come next year. The Fed is also withdrawing some of the stimulus from its years of bond purchases by letting some of its holdings run down.

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 the central bankers are leery of startling financial markets that have been boosted for years by the introduction of newly printed money into the financial system through bond purchases, known as quantitative easing.

The ECB has tried to reassure markets that its stimulus efforts will be withdrawn slowly so as not to disrupt the economic recovery that saw the economy in the 19 countries that use the euro expand 2.6 percent in the third quarter from the quarter before.

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 percent. That negative rate is a penalty imposed to push banks to lend the money, not let it pile up at the ECB.

The ECB will give an important clue about the future course of stimulus policy when it reveals its inflation estimate for 2020. That figure will suggest whether the bank expects to finally achieve its inflation goal of close to but below 2 percent annual inflation, the rate considered best for the economy. A projection of 1.8 percent would strengthen the likelihood that the stimulus would end in September, while anything less would support the view that the bank might have to continue it through the end of the year.

The bank 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 bond purchases have meant unusually low market interest rates for government and corporate borrowers. A 10-year German government bond yields around 0.33 percent, compared with 2.38 percent for the equivalent U.S. Treasurys. That has made it easier for companies to borrow affordably, and taken pressure off government finances.

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 remains the "risk of a rapid repricing in global markets."

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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.Investors are now waiting for President Mario...
Thursday, 14 December 2017 09:39 AM
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