ECB ‘ready to act’ in face of Brexit head­winds

Financial Mirror (Cyprus) - - FRONT PAGE -

Euro­pean Cen­tral Bank pol­i­cy­mak­ers have warned of “new head­winds” for the euro­zone fol­low­ing Bri­tain’s vote to quit the EU, ac­cord­ing to min­utes of their July meet­ing re­leased last week.

“Down­side risks had clearly in­creased,” in the wake of Brexit, noted the ac­counts made pub­lic four weeks af­ter the govern­ing coun­cil met in July. The votes and views of par­tic­u­lar coun­cil mem­bers are not re­vealed.

The ECB pol­i­cy­mak­ers stressed that “the govern­ing coun­cil needed to re­it­er­ate its ca­pac­ity and readi­ness to act”, but there was no more con­crete sign in the min­utes that the ECB plans to fur­ther loosen mon­e­tary pol­icy in re­sponse to the Brexit vote, which could strike a blow to growth in the euro­zone.

In fact, the coun­cil did not want to be seen “fos­ter­ing un­due ex­pec­ta­tions” about how the bank might re­spond.

ECB Pres­i­dent Mario Draghi an­nounced af­ter July’s meet­ing that the bank was “ready, will­ing and able” to in­ter­vene if nec­es­sary, although he left in­ter­est rates and “quan­ti­ta­tive eas­ing” mea­sures un­changed un­til Septem­ber.

Speak­ing at the Euro­pean Par­lia­ment’s Com­mit­tee of Eco­nomic and Mon­e­tary Af­fairs be­fore the UK ref­er­en­dum, Draghi did not give de­tails of any prepa­ra­tions.

But he said that there were “ex­ten­sive con­sul­ta­tions” be­tween cen­tral bankers and the In­ter­na­tional Mon­e­tary Fund, although no pre­cise plans were be­ing pre­pared to deal with the con­se­quences of the vote.

Draghi warned how­ever that it was hard to assess whether the ECB’s ac­tions would be enough to calm down tur­bu­lence trig­gered by a Brexit vote. “It is very dif­fi­cult to fore­see the im­pact on the var­i­ous di­men­sions a vote in the United King­dom would have on the mar­kets and the euro­zone economies,” he said.

The ECB’s head­line



of in­ter­est – paid on money banks store with the cen­tral bank – has re­mained at neg­a­tive lev­els since 2014.

Mean­while, the bank is buy­ing around EUR 80 blon of se­cu­ri­ties a month un­der its ‘quan­ti­ta­tive eas­ing’ stim­u­lus pro­gramme and is of­fer­ing banks cheap loans.

By pump­ing money into the fi­nan­cial sys­tem, the ECB hopes to boost in­fla­tion to its tar­get of just un­der two per­cent.

But such “un­con­ven­tional” in­ter­ven­tions by the ECB have so far con­trib­uted to a mere slug­gish per­for­mance in many euro­zone economies.

Euro­zone in­fla­tion stood at just 0.2% in July, ac­cord­ing to Euro­stat, an eight-month high for the sin­gle-cur­rency zone and up from June’s 0.1% – but well short of the ECB’s tar­get.

By the next pol­icy meet­ing on Septem­ber 8, the ECB coun­cil will have more in­for­ma­tion at its fin­ger­tips, in­clud­ing its own staff’s eco­nomic fore­casts.

Rel­a­tive calm on fi­nan­cial mar­kets and high con­fi­dence in euro­zone busi­ness sur­veys since Bri­tain’s June 23 ref­er­en­dum “might sug­gest that there is no need for fur­ther loos­en­ing” at next month’s gath­er­ing, an­a­lyst Jen­nifer McKe­own of Cap­i­tal Eco­nom­ics said.

But she noted that slow­ing GDP growth in the sec­ond quar­ter and a strength­en­ing euro could sap in­fla­tion and push the ECB to loosen mon­e­tary pol­icy fur­ther.

Pol­i­cy­mak­ers’ op­tions in­clude boost­ing the amount of se­cu­ri­ties the bank buys each month, ex­tend­ing the QE pro­gramme past the cur­rent March 2017 dead­line, and fur­ther low­er­ing the de­posit rate into neg­a­tive ter­ri­tory.

“We are con­vinced that all three will be needed be­fore long,” McKe­own said.

But Howard Archer of IHS Global Insight was “doubt­ful that the ECB will take in­ter­est rates any lower.”

Ac­cord­ing to the min­utes, ECB coun­cil mem­bers be­lieve the cen­tral bank should in­stead fo­cus on the mea­sures it an­nounced last March — boost­ing the amount of bonds it buys each month, ex­tend­ing QE to cor­po­rate as well as gov­ern­ment bonds, and of­fer­ing banks new cheap loans.

“Height­ened con­cern over the im­pact that neg­a­tive/low in­ter­est rates are hav­ing on euro­zone banks” makes a fur­ther cut un­likely, Archer said.

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