Eurozone consumer prices would barely grow this year, damped by the sharp fall in oil prices, prompting the European Central Bank President Mario Draghi to deliver more stimulus than what markets hoped, and policymakers expect euro area interest rates to remain very low for a long period of time as the bank signaled that there were limits to how much they can be reduced.
Draghi apparently pulled out all crisis-fighting weapons earlier on Thursday, as the ECB announced a slew of stimulus measures for the euro area economy, that included a cut to all three of its interest rates and an expansion to its asset purchase programme. The bank also announced a new round of longer-term financing operations and decided to include investment grade non-bank debt in its list of eligible assets for purchases.
In its policy session in Frankfurt, the 25-member Governing Council lowered its benchmark interest rate, the main refinancing rate, by five basis points to a record low zero percent, while economists had expected the rate to be left unchanged.
The already-negative deposit rate was cut by 10 basis points to -0.40 percent, in line with economists’ expectations. The marginal lending facility rate was reduced by five basis points to 0.25 percent, while economists had expected the rate to be held steady.
Further, the bank expanded the monthly purchases under the asset purchase programme by EUR 20 billion to EUR 80 billion starting in April. Economists were looking for an increase of at least EUR 10 billion.
Additionally, the bank announced a new series of four targeted longer-term refinancing operations, dubbed TLTRO II, each with a maturity of four years. These will start in June. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility, the bank said.
“This comprehensive package will exploit the synergies between the different instruments and has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels below, but close to, 2 percent,” Draghi said in the introductory statement to his press conference.
Responding to question from reporters, Draghi said policymakers did discuss a multi-tiered deposit rate, but discarded that option as it was too complex for euro area and the bank did not want to signal that there was no limit to how low interest rates can go.
While acknowledging the risk of adverse effects of more negative rates on bank profitability, Draghi said the ECB’s experience with negative rates have been very positive.
Further, Draghi said there was an overwhelming majority of the rate-setters were in favor of the latest stimulus package. “There was a very reassuring, positive, constructive discussion in the Governing Council,” he said.
“The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases,” Draghi said.
“It is crucial to avoid second-round effects by securing the return of inflation to levels below, but close to, 2 percent without undue delay,” he said.
Further, Draghi said if policymakers surrender to low inflation, then there will be deflation that raises the real value of debt. The latest efforts by the bank has proven that the ECB is not short of ammunition, but a solid recovery was needed for inflation to return to target, he added.
The March 2016 ECB Staff macroeconomic projections unveiled by Draghi revealed a sharp downgrade to the inflation forecast for this year to 0.1 percent from 1 percent. The projection for next year was lowered to 1.3 percent from 1.6 percent. Inflation is seen at 1.6 percent in 2018.
The bank said the downgrade mainly reflected the fall in oil prices over recent months and inflation rates are expected to remain at negative levels in the coming months and to pick up later in 2016.
The euro area growth forecast for this year was lowered to 1.4 percent from 1.7 percent. The outlook for next year was cut to 1.7 percent from 1.9 percent. Growth was seen at 1.8 percent for 2018.
The risks to the euro area growth outlook remain tilted to the downside and arise mainly from the heightened uncertainties in the global economy as well as the broader geopolitical risks, the ECB said.
Asset purchases will continue until the end of March 2017, or beyond, if necessary, he said. The ECB also raised the issuer and issue share limits for the purchases of securities issued by eligible international organisations and multilateral development banks from 33 percent to 50 percent.
Loan growth in the euro area remains very low, Draghi said. He hoped that the inclusion of non-bank debt in the list of eligible assets for purchasing will further strengthen the pass-through of asset purchases to the financing conditions of the real economy.
“A bank that is very active in lending to the real economy, can borrow more than banks active in other ways,” Draghi said.
Regarding the new TLTRO II, Draghi said these new operations will reinforce the ECB’s accommodative monetary policy stance and will strengthen the transmission of monetary policy by further incentivising bank lending to the real economy.
The ECB expects a “very sizeable take-up” of the TLTRO II given the economic recovery and the very attractive conditions, the central bank chief added.
In order to reap the full benefits from monetary policy measures, other policy areas must contribute decisively, Draghi reiterated. He also urged all countries should strive for a more growth-friendly composition of fiscal policies.
The material has been provided by InstaForex Company – www.instaforex.com