European Central Bank Does Something Unexpected
December 8, 2016
Back last March, the Governing Council had augmented monetary policy easing in several ways, such as cutting the interest rates by 5 bps each in the case of the refinancing rate (now at zero percent) and marginal lending facility (0.25%) as well as the deposit rate by 10 bps to -0.40%. Monthly asset purchases were increased at that time to EUR 80 billion from EUR 60 billion, and the earliest end of those purchases was extended six months to March 2017.
Prior to today’s final Council meeting of 2016, analysts thought the monthly total might be raised again or at least that the earliest termination of the program would be extended a couple of quarters. Council members decided on a combination of measures that had eluded forecasters. The program will be extended at least until the end of next year, but the monthly asset buying for next April-December is being scaled back to EUR 60 billion. Furthermore, a series of conditions are spelled out that could prompt quantitative stimulus to be raised again or the program to be continued past end-2017.
From April 2017, our net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration. The net purchases will be made alongside reinvestments of the principal payments from maturing securities purchased under the APP.
To ensure the continued smooth implementation of the Eurosystem’s asset purchases, the Governing Council decided to adjust the parameters of the APP as of January 2017 as follows. First, the maturity range of the public sector purchase programme will be broadened by decreasing the minimum remaining maturity for eligible securities from two years to one year. Second, purchases of securities under the APP with a yield to maturity below the interest rate on the ECB’s deposit facility will be permitted to the extent necessary.
New staff forecasts were unveiled. Like changes made at the prior full review in September, these modifications are very modest. The estimates of 1.7% growth and 0.2% CPI inflation this year are in fact the same as before. For 2017, growth was bumped up 0.1 percentage point (ppt) to 1.7%, and inflation was nudged 0.1 ppt higher too to 1.3%. For 2018, projected growth of 1.6% is the same, and projected inflation has been edged down 0.1 ppt to 1.5%. Newly introduced 2019 forecasts show growth of 1.6% and inflation of 1.7%, the later of which does not “really meet the medium term goal” according to ECB President Draghi at his press conference.
Other price developments have disappointed ECB officials. To be sure, the on-year rise is increasing and will do so more in coming months, but the reason lies totally in energy, mostly the base effect of that item. Non-energy inflation has not risen. Such was 0.8% in November versus 1.0% a year earlier. Core CPI, which also excludes food, tobacco and alcohol was also 0.8%, down from 0.9% in November 2015. The global price of oil is in fact higher than when the Council met last time.
Draghi stressed that it would be mistaken to infer that the downshift to EUR 60 billion of asset purchases each month constitutes a tapering of non-standard policy support. While he said officials had considered keeping EUR 80 billion, the combination of today’s actions was chosen to make policy overall more flexible and pragmatic.
Copyright 2016, Larry Greenberg. All rights reserved. No secondary distribution without express permission.