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ECB drops easing bias en route to stimulus exit

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FRANKFURT (Reuters) - The European Central Bank dropped a long-standing pledge on Thursday to increase its bond buying if needed, taking another small step in weaning the euro zone economy off protracted stimulus.

Keeping its broader policy unchanged, the ECB said it could still extend its 2.55 trillion euro ($3.16 trillion) bond purchase scheme beyond September if needed. But it omitted a reference to bigger purchases, a signal that it remains on track to end a three-year-old stimulus scheme before the end of 2018.

Having revived euro zone growth with lavish stimulus, the ECB has been dialing back support in tiny increments, fearing any big change could unravel its work and force an embarrassing and economically damaging policy reversal.

“The net asset purchases, at the current monthly pace of 30 billion euros, are intended to run until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim,” the ECB said in a statement after its regular policy meeting.

Euro zone inflation remains stubbornly low. “Our mandate is in terms of price stability. Victory cannot be declared yet,” ECB President Mario Draghi told a news conference.

Dropping the ECB’s so-called easing bias is largely symbolic as few if any expected bigger bond buying. But the move was still seen as a precursor to a broader revision of the bank’s policy guidance, a move flagged in earlier meetings.

“This is, in our view, an important first step toward the exit of unconventional policies, and increases the probability that the asset purchases will be finalised in September,” said Kjersti Haugland, chief economist at DNB Bank.

The euro, which was down 0.3 percent at $1.2378 EUR= before the announcement, firmed to the day's high of $1.2431 before easing back 0.1 percent to $1.2409.

Draghi unveiled a modest upgrade of the ECB’s euro zone economic growth forecast to 2.4 percent from 2.3 percent previously, with projections for 2019 and 2020 unchanged at 1.9 percent and 1.7 percent respectively.

“Incoming information, including our staff projections, confirms the strong and broad-based growth momentum in the euro area economy, which is projected to expand in the near term at a somewhat faster pace than previously expected,” he said.

With U.S. President Donald Trump due later on Thursday to hold talks over planned new steel and aluminum tariffs, Draghi cited “rising protectionism” as a risk to the economy.

DICHOTOMY

The dichotomy facing the ECB is that while growth has blown past expectations, inflation remains weak, having hit a 14-month low in February and staying well short of its target of almost 2 percent, the bank’s sole mandate.

While the bloc’s five-year growth run and a rapid drop in unemployment suggest that inflation will eventually rise, its rebound is still months away, complicated by the euro’s rise against the dollar, which puts a lid on price growth.

Launched amid fears of deflation, the ECB’s quantitative easing scheme depressed borrowing costs and induced firms to borrow and invest. While the deflation threat is long gone, the euro’s volatility risks derailing the bank’s efforts.

Indeed, while economists polled by Reuters expect bond buying to conclude at the end of this year, a first interest rate increase is expected only in the second quarter of 2019.

With Thursday’s policy decision, the ECB’s benchmark deposit rate will stay at minus 0.4 percent and the main refinancing rate, the main policy benchmark during normal times, at 0.00. Asset buys are set to continue at 30 billion euros per month.

Additional reporting by Tom Sims; writing by Mark John; Editing by Catherine Evans and David STamp

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