ECB Leaves Guidance Unchanged as Anticipation for Autumn Builds

(Bloomberg) -- The European Central Bank deferred the delicate decision of how and when to venture the next step toward policy normalization until later this year.

The Governing Council repeated that it expects borrowing costs to stay at present levels for an extended period of time and that it is prepared to increase the size or duration of the asset-purchase program should the economy take a turn for the worse. Economists in a Bloomberg survey published earlier this week were split as to whether the ECB would revise its language on quantitative easing. The attention now turns to Draghi’s press conference at 2:30 p.m. in Frankfurt.

Thursday’s announcement comes six weeks after the ECB took an initial step toward winding down unconventional monetary policy by dropping the wording on additional interest-rate cuts and stating the risks to the economic outlook had become broadly balanced.

Yet officials face a conundrum because -- as ECB President Mario Draghi noted last month -- the region’s stronger economic growth has had an unusually muted impact on consumer prices. The headline inflation rate, which clocked in at 1.3 percent in June, remains a considerable way off the 2 percent price-stability goal.

Still, Draghi appeared to indicate a shift in tone on June 27 when he said “reflationary forces” were once again at play and said it would be feasible to tweak existing policy tools without shortchanging the economic recovery. The remarks caused the euro and bond yields to surge.

The ECB maintained its deposit rate at minus 0.4 percent, kept the main refinancing rate at zero and retained its commitment to buy 60 billion euros ($69 billion) of debt a month until at least the end of the year.

Judging by comments this month by Bank of France Governor Francois Villeroy de Galhau, the next change in guidance for the ECB’s stimulus may come in the fall. His stance, as well as that of ECB chief economist Peter Praet, differs from that of Dutch Governor Klaas Knot, who has warned the central bank is “very close to the point” of buying bonds for too long.

In preparation for any such step, staff in Frankfurt are examining scenarios for the future path of quantitative easing for a decision policy makers might take in September or even later, according to euro-area officials familiar with the matter. Yet with the euro close to a two-year high, already tantamount to a tightening of monetary conditions, officials have stressed the need to communicate any moves carefully so as not to roil markets.

Governing Council members considered but ultimately decided against removing the conditional pledge to increase the bond-buying program at their June 7-8 meeting, according to an account of the deliberations.

September could be the month the ECB announces a new plan for reducing the bond purchases, according to this month’s Bloomberg survey of economists. The winding down is seen starting in January and taking nine months.

--With assistance from Brian Swint Maria Tadeo Piotr Skolimowski Carolynn Look Chad Thomas Adveith Nair Lucy Meakin Jill Ward Stuart Metzler Alexander Kell Zoe Schneeweiss Craig Stirling Jana Randow Alessandro Speciale and Niveditha Ravi

To contact the reporter on this story: Catherine Bosley in Frankfurt at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, Jana Randow

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