The European Central Bank on Thursday announced an extension and expansion of its asset purchase programme, as it lowered the inflation forecasts for next two years, but the stimulus measures apparently failed to meet market expectations.
The latest round of stimulus from the ECB began with a 10 basis points cut to its deposit rate earlier on Thursday. The rate was thus taken deeper into negative territory to -0.30 percent. The size of the reduction was at the lower end of the 10-20 basis points cut economists had forecast.
The Governing Council, which met in Frankfurt, left the main refinancing rate, or the refi, unchanged at record low 0.05 percent and the marginal lending facility rate at 0.30 percent.
During his post-decision press conference, ECB President Mario Draghi announced that the bank’s EUR 1.1 trillion asset purchase programme, or APP, will be extended until March 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 aim of achieving inflation rates below, but close to, 2 percent over the medium term.”
The ECB left the size of the monthly asset purchases under the APP unchanged at EUR 60 billion, contrary to economists’ expectations for a boost to as much as EUR 80 billion. The APP was launched in March this year.
The bank also decided to reinvest the principal payments on the securities purchased under the APP as they mature, for as long as necessary.
Regarding the expansion of asset purchases, the bank included euro-denominated marketable debt instruments issued by regional and local governments located in the euro area in the list of assets that national central banks can buy under the public sector purchase programme.
Further, the ECB decided to continue conducting the main refinancing operations and three-month longer-term refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2017.
“Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2 percent and thereby to anchor medium-term inflation expectations,” Draghi said in his introductory statement.
The euro strengthened immediately following the ECB rate cut announcement, but trimmed its gains during the Draghi press conference.
Capital Economics economist Jonathan Loynes reckoned that the extension of the APP will raise the total programme to close to EUR 1.5 trillion, which is about 15 percent of Eurozone GDP, well short of the U.S. and U.K. central banks’ programmes.
“It’s possible that the slightly better news on the economy over recent weeks persuaded the Governing Council that more aggressive action was not necessary. And Mr Draghi has left the door open to further policy loosening in the future,” Loynes said.
“Nonetheless, together with the rate cut, this will be seen as a clear disappointment in the light of the repeated extremely dovish signals from the President and his colleagues.”
Responding to reporters’ questions, Draghi reiterated that the APP remains flexible in terms of its size, composition and duration, and the bank will review the technical parameters of the scheme in Spring.
“The Governing Council will closely monitor the evolution in the outlook for price stability and, if warranted, is willing and able to act by using all the instruments available within its mandate in order to maintain an appropriate degree of monetary accommodation,” the ECB Chief said.
Draghi pointed out that ECB Staff projections still indicate continued downside risks to the inflation outlook and slightly weaker inflation dynamics than previously expected.
“The persistence of low inflation rates reflects sizable economic slack weighing on domestic price pressures and headwinds from the external environment,” he said.
“Our new measures will ensure accommodative financial conditions and further strengthen the substantial easing impact of the measures taken since June 2014.”
The central bank expects euro area recovery to proceed. Draghi noted that the recovery has become broader and is mainly driven by consumption.
The latest ECB Staff projections that Draghi unveiled on Thursday, revealed an upward revision to the Eurozone growth forecast for this year to 1.5 percent from 1.4 percent seen in September. The outlook for next year was retained at 1.7 percent, while the prediction for 2017 was raised to 1.9 percent from 1.8 percent.
The bank retained the inflation forecast for this year at 0.1 percent, while it lowered the outlook for next year to 1 percent from 1.1 percent. The projection for next year was cut to 1.6 percent from 1.7 percent.
The material has been provided by InstaForex Company – www.instaforex.com