ECB to refuel its quantitative easing rocket in December
Mario Draghi, ECB president, Thursday signalled following a meeting of the central bank's governing council in Valletta, Malta, that the bank is ready to refuel its quantitative easing (QE) rocket with a ramp-up in bond purchases and a cut to the already negative deposit rate for single currency area banks, to counter very low inflation and a tepid recovery.
“It was not a wait-and-see, but it was a work-and-assess,” Draghi said at a press conference on the decision of the governing council not to make a move yet. "We are ready to act if needed, we are open to a whole menu of monetary policy instruments.”
The ECB president says the risks to the euro area growth outlook remain on the downside, "reflecting in particular the heightened uncertainties regarding developments in emerging market economies, which have the potential to further weigh on global growth and foreign demand for euro area exports. Increased uncertainty has recently manifested itself in financial market developments, which may have negative repercussions for euro area domestic demand."
Euro area real GDP increased by 0.4% quarter on quarter in the second quarter and a similar outcome is expected to be reported for the third quarter. Euro area annual inflation was -0.1% in September 2015, down from 0.1% in August.
Overall the economic recovery is set to continue, but impacted in particular by weaker than expected foreign demand.
“The degree of monetary policy accommodation will need to be re-examined at our December policy meeting when the new Eurosystem projections will be available,” said Draghi, referring to quarterly growth and inflation forecasts issued by ECB staff economists.
The central bank’s governing council on Thursday held the deposit rate, which it charges on banks’ deposits parked at the ECB, at minus 0.2%. The benchmark main refinancing rate, charged on banks’ borrowings from the central bank, stayed at 0.05%. Both rates are at record lows.
The ECB president said cuts into negative territory by other central banks, such as the Swiss National Bank and Scandinavian authorities, had led the ECB to reexamine where the lower boundary for interest rates lay.
“We’ve seen the experience of other central banks and now we’re thinking about that,” Draghi said.
This week's Economist says exports to emerging markets may now slow, despite the competitive advantage of a cheap currency. "These account for 25% of the Eurozone’s exports, and around 30% of those of Germany, France, Italy and Spain. Germany’s success in exporting to China, which alone accounts for almost 7% of its exports, is now a source of vulnerability. Because of its prowess in manufacturing capital goods, the German economy has been a perfect match for the investment-driven growth of China. But China’s growth is both slowing and rebalancing from investment and towards services.
Already there are warning signs. German exports fell sharply in August compared with July, while manufacturers’ new orders also declined. In the euro zone as a whole industrial output also fell in August month-on-month, by 0.5%. Instead of quickening the recovery may slow; economists at Barclays are forecasting GDP growth of 0.3% in the third quarter."
The 25-member ECB governing council meets in Malta. Patrick Honohan, outgoing Irish central bank governor
is in the 2nd row, 3rd from right.
Last January the ECB said it would inject at least €1.1tn into the Eurozone economy by purchasing about €60bn worth of bonds each month from the market until the end of September 2016, or even longer.
Draghi was asked: "Is there concern in the Governing Council that the asset purchase programme could be insufficient to create conditions that support growth and avoid the threat of deflation?"
"Our judgement today is that the monetary stance that has been designed with the monetary policy measures announced in January, with the credit-easing measures announced in the course of 2014, is essential for producing recovery in output and convergence of inflation towards the objective of being below but close to 2% over the medium term. These objectives are predicated on the full implementation of this monetary policy. That's the current assessment. However, if we were to see that the technical assumptions underlying these projections have worsened, or the downside risks are increasing and further on materialising, we may well change the size, the composition, the design of all our monetary policy instruments as needed."
Draghi said earlier that low inflation doesn't mean that we want high inflation. "We just want to be compliant with our mandate, which is to drive inflation back to below but close to 2% in the medium term."
The euro fell about 1.7% versus the US dollar while the Stoxx 60 share benchmark closed up 2%.
ECB Press Conference - 22 October 2015