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Friday 19 January 2018

ECB sees prolonged lack of inflation, ready to act

ECB kept interest rates at historic low of 0.25pc today

Mario Draghi
Mario Draghi

Euro zone inflation will stay well below target for the next two years and the European Central Bank is ready to act if necessary to lift a listless economy, it said today.

The ECB left its key interest rate at 0.25pc at its last policy meeting of the year, choosing not to follow through on November's surprise cut.

Markets expect further action in 2014, something ECB President Mario Draghi did nothing to deflect.

"We may experience a prolonged period of low inflation to be followed by a gradual upward movement ... later on," Draghi told a news conference. "We are monitoring developments closely and are ready to consider all available instruments."

He said Thursday's discussion had not focused on any one measure but there had been a "brief discussion" about cutting the deposit rate into negative territory, in an attempt to get banks lending more.

The decision to hold the main refinancing rate at a record low was widely expected after inflation edged up to 0.9pc in November, partially reversing a plunge to 0.7pc the month before. Unemployment has also fallen slightly.

Fresh forecasts from ECB staff predicted inflation would average just 1.1pc next year and 1.3pc in 2015 - well below the ECB's target of close to but below 2pc.

Growth is seen at a sluggish 1.1pc next year, although that is slightly higher than the 1pc estimated in September.

Draghi said the risks to that outlook were skewed to the downside.

Those threats included higher commodity prices, weaker domestic demand and export growth, and failure by euro zone government to implement structural economic reforms.

POLICY OPTIONS

A Reuters poll of economists last week found the vast majority did not expect the ECB to start printing money in the way the Federal Reserve, Bank of Japan and Bank of England have.

Britain's central bank also left policy on hold on Thursday.

But the poll suggested the ECB will conduct another long-term refinancing operation (LTRO), which gives banks access to cheap cash, early next year, as it did with more than a trillion euros in late 2011 and early 2012.

"The level of preparedness is pretty high on all (policy options)," Draghi said.

In the run-up to Thursday's meeting, several senior policymakers flagged the ECB's readiness to ease policy further if needed, while at the same time playing down the prospect of immediate action.

Peter Praet, the bank's chief economist who begins the rate meetings with a policy recommendation, last month put the possibility of the ECB embarking on asset buys - or quantitative easing - on the agenda.

However, another senior ECB policymaker, Benoit Coeure, said last week the ECB did not need to make large-scale asset purchases.

The bank's vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight - now at zero - into negative territory in an extreme situation.

Draghi said an LTRO would only be conducted if the ECB felt confident the money would flow into the real economy and not subsidize banks' balance sheets.

Banks invested much of last year's cheap money in stocks and bonds and made a tidy profit. At the same time, lending levels have continued to fall.

 

Reuters

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