FRANKFURT—The European Central Bank on Thursday lowered its forecasts for Europe’s economic growth this year and next, but said it would press ahead with a carefully telegraphed plan to phase out easy money.
The decision underscores the delicate task facing the world’s No. 2 central bank: The ECB has started to pivot away from years of ultralow interest rates, following the Federal Reserve, just as the eurozone economy softens and faces headwinds ranging from Brexit to vulnerabilities in its neighbor, Turkey.
In a statement, the ECB said it expects to wind down its €2.5 trillion ($2.9 trillion) bond-buying program—known as quantitative easing, or QE—by year-end, confirming a plan outlined in June. The bank also expects to hold its benchmark interest rate at the record low of minus 0.4% at least through the summer of 2019.
“When we stop [buying bonds], this doesn’t mean our monetary policy stops being” supportive, ECB President Mario Draghi said at a news conference, citing the low level of interest rates and a pledge to keep rates where they are for a long time.
The euro rose slightly against the dollar during Mr. Draghi’s press conference but remains close to its lowest level in a year. That reflects the ECB’s delay in raising interest rates even as the Fed is expected in late September to raise interest rates for a third time this year. German government bond yields rose slightly.
Earlier Thursday, Bank of England policy makers struck a similarly cautious note, voting unanimously to leave interest rates on hold at 0.75% despite strengthening growth and inflation. The central bank highlighted concerns around Britain’s departure from the European Union next March, as protracted negotiations create uncertainty for businesses and households.
Mr. Draghi cautioned that risks related to trade protectionism, emerging-market weakness and volatility in financial markets “have gained more prominence recently.”
The ECB shaved its forecasts for growth in the 19-nation currency union by 0.1 percentage points for this year and next, to 2% and 1.8% respectively. It expects eurozone inflation to average 1.7% this year and the following two years, unchanged from its forecast three months ago.
Still, recent data broadly support the ECB’s expectation for broad-based economic growth and a gradual buildup in inflation, Mr. Draghi said. He played down the impact of weaknesses in emerging markets such as Turkey, whose central bank sharply increased interest rates to 24% on Thursday to help counter a jump in inflation.
“In the aggregate what’s happening in Argentina and Turkey so far doesn’t show any significant spillover, although at the level of individual institutions you may well see significant exposures,” Mr. Draghi said.
The ECB’s optimism “remains predicated on the view that the euro area economy is still growing above potential, with enough accumulated speed to fuel inflationary pressure,” said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.
Analysts say the ECB is effectively on autopilot, pressing ahead with protracted plans to exit easy money in part because its options are limited: After years of aggressive stimulus, the bank would struggle to extend QE into next year under the program’s current rules.
Mr. Draghi also sought to calm concerns that the new populist government in Italy, his home country, could confront EU authorities over the bloc’s 3% budget-deficit limit.
“The ECB will stay with what the Italian prime minister, the Italian minister of economy, and the Italian foreign affairs ministers have said, namely that Italy will respect the rules,” Mr. Draghi said.
Mr. Draghi offered no fresh clues as to the main issue preoccupying investors: When, and how quickly, will the ECB raise interest rates? Most analysts expect a first ECB rate hike toward the end of next year, probably of around 0.15 percentage points.
For some economists, particularly in Germany, the first rate hike can’t come fast enough. German officials have complained repeatedly that the ECB’s easy money penalizes the nation’s savers while rewarding indebted southern European governments.
Joerg Kraemer, chief economist at Commerzbank in Frankfurt, said that, by leaving open the option of fresh extension of QE, the ECB had missed a good opportunity to clearly end the program.
“This shows once again how hesitant the ECB is,” Mr Kraemer said. “More than ever I do not expect a real rate hike cycle in the coming years.”