ECB expected to take further action to boost eurozone economy

Mario Draghi

The European Central Bank is expected to take further action to stimulate the eurozone economy at its next meeting in March.

Minutes of the ECB governing council’s last get-together show that without an improvement in the outlook for growth for the rest of the year and 2017, policymakers are ready to cut credit costs further to boost bank lending.

A risk that emerging market growth prospects will slow further and volatile markets refuse to recover from their recent lows will send already low inflation across the eurozone tumbling again, it said.

The strong hint of more interest rate cuts and a possible increase in the level or scope of the current €60bn (£46.5bn) a month of quantitative easing (QE), follows comments earlier this week from the ECB boss, Mario Draghi, who said the central bank was “ready to do its part” to boost growth and inflation.

The governing council said: “At the start of the new year, downside risks increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks.

“In this environment, euro area inflation dynamics also continue to be weaker than expected. Therefore, it will be necessary for the governing council to review and possibly reconsider the ECB’s monetary policy stance in early March, when the new staff macroeconomic projections – also covering the year 2018 – will become available,” it said.

In another indication of its readiness for action, the council added that, 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”.

Peter Vanden Houte, an economist at ING Financial Markets, said: “The bottom line is that the ECB looks ready to act again in March. Since the January meeting the economic environment has deteriorated and financial stress has barely softened.”

But Vanden Houte said there was a risk the bank would drown the eurozone with extra central bank funds.

“The ECB is starting to hit the boundaries of what monetary policy can achieve. The current medicine of negative interest rates and QE seems to have lost its magic and the risk is now that an overdose might even have the opposite effect than what the ECB is aiming for. Too much of a good thing might be a bad thing, also in monetary policy.

Howard Archer, chief economist at IHS Global Insight, said he expected the ECB to trim its deposit rate by a further 10 basis points to -0.40% at its March meeting and step up its monthly purchase of assets, perhaps by €20bn-30bn from the current level of €60bn.

“Of course, there is appreciable German-led opposition within the governing council to more QE in particular, so just how much stimulus the ECB delivers in March could yet depend on how oil prices and inflation expectations develop over the next few weeks, and whether global economic uncertainties and financial market turmoil show any signs of easing,” he said.

Powered by article was written by Phillip Inman Economics correspondent, for on Thursday 18th February 2016 18.42 Europe/ © Guardian News and Media Limited 2010


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