European Central Bank Cuts Inflation View and Says More Stimulus is Possible in Early March

January 21, 2016

The previous Governing Council meeting on December 3 had cut the deposit rate by 10 basis points to negative 0.30%, extended the EUR 60 billion per month asset purchase program (APP) by six months to March 2017, and agreed to reinvest the maturing principal of assets purchased in the APP. 

Today’s meeting did not initiate new measures but made up for the not unexpected lack of fresh action with reassuring rhetoric in both the released written statement and verbal remarks at President Mario Draghi’s subsequent press conference.  The key admissions from the statement are

It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available which will also cover the year 2018. In the meantime, work will be carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed.

Downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks.

Although moderate recovery continued last quarter, the risks to the euro area growth outlook remain on the downside and relate in particular to the heightened uncertainties regarding developments in the global economy, as well as to broader geopolitical risks. These risks have the potential to weigh on global growth and foreign demand for euro area exports and on confidence more widely.

On the basis of current oil futures prices, which are well below the level observed a few weeks ago, the expected path of annual HICP inflation in 2016 is now significantly lower compared with the outlook in early December. Inflation rates are currently expected to remain at very low or negative levels in the coming months and to pick up only later in 2016.

Because sub-target inflation will be persisting longer than thought before, risks of second-round effects should be monitored closely. A more comprehensive picture of the impact of oil prices and other external and domestic factors on the outlook for HICP inflation will become available in the March 2016 ECB staff macroeconomic projections, which will also cover the year 2018.

There’s no inconsistency between changing policy last month, actions which Draghi in the press conference defended as appropriate at that time, and a realization that more steps should be considered at the next meeting.  External circumstances changed after the December 3 decisions were taken.  New facts warrant possible policy response.  Asked if the decision to review all options in March might cause questions about ECB credibility, Draghi replied that only if the ECB were not willing and determined to act further would credibility be likely to suffer damage.  He offered that a full review is supported unanimously by the Council.  Finally, Draghi predicted that ECB interest rates will remain at present or lower levels for an extended period of time.  By March, policymakers we be looking to decide the permanence of the increased commodity and financial market volatility.  If the problems persist, an unwanted tightening of eurozone monetary conditions would result.  Euroland share prices rallied and the euro shed value during the press conference.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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