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European Central Bank chiefs went ahead and halted a key element of their economic stimulus programme despite a complex, shifting array of risks to growth, an account of their December meeting showed Thursday.
Looking ahead, ‘it was underlined that the situation remained fragile and fluid, as risks could quickly regain prominence or new uncertainties could emerge,’ the central bank chiefs and ECB board members judged.
That was true even if for now ‘certain downside risks – regarding trade tensions, emerging markets, US monetary policy and developments in sovereign bond markets in the euro area – had receded,’ they added.
Policymakers agreed in December to halt net purchases of government and corporate bonds at the end of 2018 after three years and 2.6 trillion euros ($3.0 trillion).
Designed to pump cheap money through the financial system, boosting growth and in turn inflation, the ‘quantitative easing’ (QE) scheme was judged a success by ECB chief Mario Draghi in his press conference following the meeting.
‘In some parts of this period of time, QE has been the only driver of this recovery,’ he said.
ECB staff forecasts issued last month now see inflation on track towards the central bank target of just below 2.0 percent by 2021, although the Frankfurt institution trimmed its expectations for GDP growth.
But the December account shows major concerns weighing on central bankers’ minds ,including ‘the frequently changing state of discussion on trade issues.’
Little progress has so far been made on attempts to transform a temporary US-EU tariff truce into a more permanent deal while the economy continues to suffer the fallout from Washington’s trade confrontation with Beijing.
Meanwhile deadlock in the British political system is swelling the risk of a chaotic withdrawal from the EU as Brexit day on March 29 draws nearer.
Although Turkey and Argentina had stabilised after major wobbles earlier in 2018, ‘vulnerability related to others was already looming,’ the bankers noted.
‘The current environment could be described as one of ‘risk rotation’ in a state of generally heightened uncertainty,’ they summed up.
Looking ahead, the ECB governing council backed the board’s plan to reinvest the proceeds of its massive bond pile for the foreseeable future and to keep interest rates low ‘at least through the summer’ of this year.
With those two tools at their limits, there is little further room for the ECB to juice the economy if a harsher slowdown than expected kicks in.
Against that background, ‘the suggestion was made to re-visit the contribution of targeted longer-term refinancing operations,’ cheap loans to banks conditional on onward lending to firms and households, the account noted.