The Frankfurt institution left interest rates at historic lows and held fast to plans to buy 30 billion euros ($37.2 billion) of government and corporate bonds per month until September, offering no hints about when it might step back from the mammoth stimulus programme.
Central bankers’ caution may have been prompted by remarks from US Treasury Secretary Steven Mnuchin, who declared Wednesday that “a weaker dollar is good for us” — helping send the euro to its highest level against the greenback since December 2014.
The former banker downplayed the comments Thursday by insisting the Trump administration “believe in free currencies” and was “not concerned with where the dollar is in the short term”.
But the market reaction underscored how tricky it will be for the ECB to wean the eurozone off mass bond-buying and ultimately raise interest rates in the coming months and years.
Mnuchin’s remarks came after the single currency was already stoked by the minutes of the ECB’s December’s meeting, which revealed governors plan to “revisit” policy early this year.
The ECB’s almost 2.3 trillion euros in purchases of government and corporate bonds, cheap loans to banks and historic low interest rates have aimed to fire eurozone growth and boost inflation towards its target of just below 2.0 percent.
Growth has indeed picked up — estimated at 2.4 percent in 2017 — but inflation stood at just 1.4 percent in December.
In what the Frankfurt institution says is a side effect — but critics allege is by design — its policy has also suppressed the value of the euro against other currencies, supporting growth by encouraging exports and inflation by making imports more expensive.
A pricier euro could slow the ECB’s quest to complete its mission, although some analysts argue there is little it can do to brake the currency’s rise.
Following Mnuchin’s comments, ECB President Mario Draghi “is likely to adopt a damage limitation mode” at a 1330 GMT press conference explaining the bank’s decisions, tearing up any plans to hint at winding down support, ING Diba bank economist Rob Carnell said Thursday.
“Throwing more fuel on the fire… would be counter-productive,” he added.
– No choice but to move –
In the ECB boardroom, strong economic fundamentals prompted some central bank governors to argue at December’s meeting that “a policy stance that remained in crisis configuration” was no longer needed.
Policymakers decided in October to cut bond-buying by half to 30 billion euros per month from January and set a time limit of September.
“We can be hopeful that the October extension was the last one,” ECB executive board member Benoit Coeure told German business daily Handelsblatt in November.
Council members favouring a prolonged, gentle exit from bond-buying are holding off more aggressive “hawks”, as the bank approaches technical limits to bond-buying that could open it to legal challenge.
Such constraints mean “the ECB is resigning itself to the inevitable” as it prepares to wind down bond-buying, Commerzbank economist Michael Schubert noted.
If the ECB halts asset purchases sooner than September, an interest rate rise — slated in ECB statements for “well after” the end of bond-buying — could also be moved up the agenda.
– Battle for higher wages –
Whatever is happening to the exchange rate, “Draghi will have to clarify things” following the market reaction to December’s minutes, Societe Generale economist Michel Martinez said.
As so often before, the smooth-talking ECB chief will likely play for time in hopes that other factors will fire price growth.
That could include eurozone workers negotiating hard for generous wage increases — previously described by Draghi as the “linchpin” of higher inflation.
German metalworkers could set the tone, as they press twin demands for a 6.0 percent salary boost and the right to go part-time for up to two years.
Elsewhere unemployment remains high, limiting upward pressure on pay.
“Wages are unlikely to pick up on a broad front” for now, with low inflation on the horizon in the short term, Commerzbank’s Schubert predicted.
“But the ECB is confident that the stronger economy will also lead to a lasting rise in inflation in the foreseeable future” that will dispel its policy woes, he added.