ECB Drops Reference to Future Interest-Rate Cut -- 5th Update

TALLINN, Estonia -- The European Central Bank took a tiny step toward unwinding its large monetary stimulus, but indicated any action is some way off, despite pressure from some in Europe to change policy soon.

At a news conference in Estonia's capital city, Tallinn, ECB President Mario Draghi unveiled brighter economic forecasts and signaled the ECB probably wouldn't cut interest rates again, a sign of confidence in the region's recovery.

But Mr. Draghi also warned inflation would remain weak over the coming years, and said ECB members hadn't discussed winding down their EUR60 billion-a-month bond-purchase program.

"We need to be patient," he said. "A very substantial degree of stimulus is still needed" to support the economy.

The euro slid as much as half a cent against the dollar and eurozone government bond prices rose as investors anticipated the ECB would leave its stimulus in place for longer. Many economists had expected Mr. Draghi to hint more strongly at an exit path.

"The ECB is essentially in a holding pattern," said Patrick O'Donnell, a fund manager with Aberdeen Asset Management in London. "There's no appetite to risk choking off the growth that the economy has been seeing of late."

Mr. Draghi's message of patience is likely to cause further irritation in Germany, Europe's largest economy, where top officials have been calling urgently for a policy reversal from the ECB. Those officials, who include German Finance Minister Wolfgang Schäuble, argue that years of easy money are inflating asset prices while harming German savers and pensioners.

"Sadly, the return to a normal monetary policy is set to drag out painfully slowly," said Jörg Krämer, chief economist at Commerzbank in Frankfurt. "An end to easy money is urgently needed to avoid the risk of new property price bubbles."

The eurozone is enjoying its most protracted growth spurt in almost a decade. Its economy grew by 1.9% on the year in the first quarter, outpacing the U.S. Unemployment has fallen to an eight-year low of 9.3%, bank lending is expanding robustly and business surveys suggest growth is accelerating.

That progress has come despite a volatile political backdrop that has included tense national elections in France and Netherlands, as well as Britain's vote to leave the European Union.

Mr. Draghi acknowledged the brighter outlook on Thursday, boasting that the region had created more jobs over the last 3 1/2 years than the U.S.

The size of the ECB's stimulus "looks increasingly out of line with the economic backdrop," said Ken Wattret, an economist with TS Lombard in London.

But in a sign of the dilemma facing the ECB, the bank also downgraded its forecasts for inflation over the next three years. It now expects consumer prices to rise by only 1.3% next year, some way below its target of just below 2%.

That downgrade underscores the continuing fragility in the region's economy. While unemployment is falling, it is still high, which is holding down wages and limiting price growth.

Despite that, most economists expect the ECB to soon start winding down its bond-buying program, known as quantitative easing or QE -- not least because it is expected to start struggling to find enough bonds to buy. It has already bought more than EUR1.5 trillion of government debt, and constraints on the program's design mean it is likely to face shortages next year in Germany and other markets. The program is currently due to last at least through December.

Some analysts said Mr. Draghi's remarks Thursday meant a decision on the future of QE might be pushed back, perhaps as late as December.

"The exit is not going to be easy," said Anna Stupnytska, an economist with Fidelity International in London. "The ECB has worked hard to put together all the elements of the current policy package...and they are likely to be extremely cautious in removing" them.

Write to Tom Fairless at

(END) Dow Jones Newswires

June 08, 2017 15:18 ET (19:18 GMT)