No ECB monetary policy reversal
June 7, 2017
The currency bloc has been on its best economic run since the global financial crisis nearly a decade ago but the ECB had been expected to take a more cautious stance as the inflation rebound has yet to show a convincing upward trend.
"The Governing Council expects the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the bank said, removing a long-standing reference to lower rates.
It kept its easy money policy unchanged as widely expected, however, including its 2.3 trillion euro ($2.59 trillion) bond-buying program and sub-zero interest rates, despite resistance from cash-rich Germany.
Announcing small upgrades in its growth forecasts through to 2019, ECB President Mario Draghi told a news conference the bank no longer saw risks to growth as being skewed to the downside.
"We consider that risks to the growth outlook are now broadly balanced," he told reporters in the Estonian capital of Talinn, in a widely expected move.
But the bank trimmed inflation forecasts for the next three years and said "substantial" amounts of stimulus through its unprecedented asset purchase scheme were still needed. The euro hit a one-week low of $1.11995, down around 0.4 percent on the day, as Draghi spoke.
With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at minus 0.4 percent. Its monthly asset purchases will continue to total 60 billion euros a month and to run until at least December. The ECB said it now saw inflation this year at just 1.5 percent, down from a previous forecast of 1.7 percent. That would barely rise to 1.6 percent in 2019, down from an earlier estimate of 1.7 percent and further away from its official target of at or close to two percent.
No inflation yet
"Now we have a new situation that the economy is relatively good, while inflation remains very low," Tödtmann told DW.
Although the inflation rate reached the ECB target of just under 2 percent in April at 1.9 percent, it fell back in May to 1.4 percent. The core inflation rate that the ECB pays particular attention to is even more depressing.
"If you look at the pace of inflation excluding energy and food, you realize that we are back to a rate that we've seen many times before, namely 0.9 percent," said Michael Schubert, ECB analyst at Germany's second-largest lender Commerzbank.
Inflation dynamics are "still dependent on the extension of our current monetary policy," ECB boss Mario Draghi emphasized recently, to help justify his bond purchase program, which will run until the end of 2017 at least.
Read more: 'Bundesbank must stop buying bonds'
Commerzbank's Schubert expects the buying to continue: "The ECB has already said that it will not terminate this program abruptly, which means that even if it thinks it is no longer necessary, it will probably let the scheme slowly taper off."
There will be fewer purchases in 2018, so instead of 60 billion, the ECB will buy 30 or 40 billion euros worth of bonds monthly. As the central bank has insisted that the bond purchase scheme would have to cease before rates are hiked, some analysts believe it could take years before the first rate increase is realized.
Meanwhile, the by-products of this ultra-loose monetary policy have become clear. "For example, as banks struggle with profitability, they have to take additional risks," Schubert told DW. The danger of bubbles in the real estate and financial markets is increasing, he added.
Sneaky seizure of savings
Germany, in particular, is the real victim of the ECB's low interest rate policy. "Germany is a country with high current account surpluses, which means that we have more savers than borrowers," said DekaBank's Tödtmann.
Read more: The German savers who must pay interest to their own bank
While savers are forced to accept negative real interest rates, debtors benefit from loans close to zero percent. According to Commerzbank's Schubert, the governments of heavily indebted countries like Spain and Greece have been able to make enormous savings.
"One can assume that some reforms were held back because the state's finances no longer look so bad. Unpopular austerity need not cut so deep."