FRANKFURT, Germany – The European Central Bank has left its stimulus program unchanged as it waits for the continent’s political situation to settle down. On Thursday it also refrained from signaling any plan to taper off its support for the economy despite evidence that growth is picking up sharply.
The stand-pat decision comes days ahead of the second round of France’s presidential election, in which anti-euro candidate Marine Le Pen is battling pro-EU front-runner Emmanuel Macron. A Le Pen victory on May 7 could unsettle financial markets since she has advocated taking France out of the shared, 19-country currency.
The statement from the central bank’s 25-member governing council on Thursday gave no fodder for additional market speculation that would ruffle financial markets, which already have enough on their minds with the French election. The statement omitted any hint of when the bank might taper off its extraordinary support measures.
Speculation of such a taper has grown as surveys show the eurozone economy accelerating sharply this year. The latest such report was a measure of economic conference by the European Commission, which hit its highest level in almost a decade.
The ECB does not seem to want to take any chances still. At 1.5 percent, inflation remains below the ECB’s goal of just under 2 percent, and unemployment is elevated at 9.5 percent.
Its statement on Thursday repeated past wording that indicates it even “stands ready to increase” stimulus if the outlook for growth and inflation worsens. Analysts consider that wording a way of discouraging investors from speculating about the end of the stimulus — which might prematurely drive up market interest rates, blunting its intended benefits.
Markets are waiting to see whether ECB President Mario Draghi drops any more hints at his post-meeting news conference. Betting is that he may acknowledge that the economy is improving but stay away from clear hints about when the stimulus will end.
The 60 billion euros ($65 billion) per month in bond purchases push newly printed money into the economy in an effort to boost inflation, which is considered too weak at 1.5 percent annually. The ECB has trimmed the purchases, which started in March 2015, from 80 billion euros a month as of April. But it insists they will continue at least until the end of the year, and in any case until inflation shows signs of turning convincingly upward.
Draghi has said they won’t be suddenly shut off after that but instead gradually reduced, but has not said when that taper will start.
Printing money and adding it to the economy can raise inflation, lower interest rates and make it easier for businesses to get the credit they need. It is considered an extraordinary step undertaken to keep Europe from falling into a chronic spiral of falling prices after the shock of the debt crisis that started in 2009 with financial trouble in Greece.
The eventual withdrawal of the stimulus will have a wide-ranging impact on businesses, governments, investors and consumers. An end to the purchases will let longer-term interest rates rise, meaning governments will have to spend a bigger part of their tax revenues on interest costs, while mortgage payments will tend to increase. Higher rates would make it easier in some cases to save for retirements or fund a pension plan, and would make bonds and bank time deposits more attractive compared to stocks.
The ECB is lagging far behind the U.S. Federal Reserve, which is already raising interest rates after the U.S. economy recovered faster from the Great Recession. ECB officials have said they won’t start raising benchmark rates until after the bond purchases end.
Several analysts think the central bank will change the wording of its statement in its June or July meetings to signal that the European economy is less in need of help. That could lead to an announcement in September on the timing of the taper to the stimulus.
Key wording currently includes the bank’s statement that economic risks are “tilted to the downside,” meaning it’s more likely the economy and inflation will grow less than expected rather than more than expected. Another key statement is the promise to increase the stimulus if things worsen.
Other stimulus measures include keeping the bank’s interest rate benchmark at a record low of zero. That rate largely steers short-term rates and keeping it that low makes it cheaper for banks to borrow money on the interbank market, which in turn would mean in lower borrowing costs for businesses.
The ECB has also imposed a minus 0.4 percent interest rate on deposits it takes from commercial banks. That is in essence a tax aimed at pushing banks to lend the money rather than leave it at the ECB’s super-safe overnight deposit facility.