FXStreet (Mumbai) – Low inflation has been a constant worrying factor for the European Central Bank. The ECB had announced a stimulus package last month. It had extended the QE to March 2017. It had also it planned to reinvest the principal payments on the securities purchased to support liquidity conditions. The central bank however disappointed the markets as it did not expand the amount of bonds purchased under QE programme. ECB Chief Mario Draghi, in an effort to assure markets that the central bank would do all that it takes to push up price pressures in the euro zone, said later that there was no limit to the tools that it can opt for to raise inflation to target.
The ECB minutes published today revealed the central bank sees further scope for deposit rate cut given that inflation is noted to be missing the central bank’s forecasts. The minutes of the ECB’s meeting on Dec. 3 highlighted the council’s willingness to keep policy accommodative.
The minutes mentioned the risks posed by the weak emerging market growth which affected the exports of the bloc, as well as other geopolitical risks. The central bank said that falling prices though will spur growth, will keep hurt inflation which has stayed at the near zero level for almost three years now. The minutes mention “The risks surrounding the outlook for HICP inflation were also assessed, on the balance, to remain on the downside.”
The ECB expects inflation to come in at 1 per cent in 2016. Inflation rate is estimated at 1.6 per cent for 2017 as against 1.7 per cent estimated earlier. GDP is expected to grow 1.5 per cent in 2015, 1.6 per cent and 1.7 per cent in 2017
The ECB cut its deposit rate to -0.3 per cent from -0.2 per cent, moving the rates further into the negative territory to raise inflation through an increase in lending and consumption. “A cut in the deposit facility rate of 10 basis points was seen as unlikely to trigger material negative side effects and was also seen as having the advantage of leaving some room for further downward adjustments, should the need arise,” the minutes said.
The bank warned that a bigger rate cut could trigger negative side effects over time, however, adding that the experiences of other countries with even lower rates had limited relevance given their small size within the global economy.
The size of asset purchase was left unchanged at 60 billion euros a month (45.36 billion). This had left investors disappointed as they had more ambitious steps from the central bank. The central bank probably wanted to leave room for future easing.
ECB rate-setters concluded that monetary policy will not be able to bring about wholesome and sustainable growth. They agreed that euro zone countries were required to put forth policies to foster growth. “A call was made to remind governments forcefully about their responsibility to contribute decisively to rebalancing the euro area economy,” the minutes said. Draghi has earlier stressed on the need for “structural recovery” to lift “not just current growth but potential growth as well”. Draghi urged countries to facilitate a “work-out” of toxic loans to facilitate recovery in credit and lending.
The minutes also pointed out that not all Council members were okay with the stimulus package. Some members, the minutes said wanted more easing than the others. Some rate setters had even proposed a bigger rate cut. Few members had suggested an increase in the monthly spend as well as a longer extension of the QE programme.
With oil price on a free-fall, the chances of inflation moving up look grim. Oil prices have dropped by 20 per cent since the ECB’s December meeting. With that inflation expectations have moved lower. The situation at hand raises possibility of a further easing soon. Policymakers do not however look keen to move immediately. They want to wait and watch the impact of the current easing measures play out.
Post the release of the minutes, the euro was noted to have firmed while the euro zone bond yields increased.
(Market News Provided by FXstreet)