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October 21, 2016

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ECB keeps interest rates at record low

THE European Central Bank kept interest rates on hold at historic lows yesterday and its president said the ECB was committed to pursuing substantial asset purchases aimed at spurring growth and inflation.

But in a news conference, Mario Draghi gave few hints as to what measures the ECB could take later this year to ensure the asset-buying continued smoothly, saying only that policy-makers “took stock” of technical work on options being conducted by their staff.

He added that the policy-makers did not discuss either ending the program or extending it.

“Sometimes it’s ... important to say what we did not discuss. And we didn’t discuss tapering or the intended horizon of our asset purchase program,” he said.

With the eurozone economy enjoying what Draghi called “a moderate but steady” recovery, he defended the stimulus effort as being more successful than the ECB had hoped, and rejected suggestions that ultra-low interest rates were counter-productive.

“The conclusion was they don’t hinder the transmission of our monetary policy. In other words, low rates work,” he said.

In a widely expected decision earlier, the ECB kept the deposit rate at minus 0.4 percent and kept its guidance for rates to stay at their current or lower levels for an extended period.

The ECB has provided unprecedented stimulus for years with sub-zero rates, free loans to banks and over a trillion euros in bond purchases, all in the hope of reviving growth and lifting inflation back to its target of just below 2 percent after more than three years of misses.

The so-called quantitative easing scheme is now set to expire in March but the ECB has always said that it would run until it saw a sustained recovery in inflation.

Any meaningful extension of asset buys will however require the ECB to modify some of the program’s technical constraints to counter the scarcity of some assets, like German bonds.

Those changes could include relaxing some of the ECB’s self-imposed constraints, like the rule prohibiting the bank to buy assets yielding less than its deposit rate.


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