Rate cut, more stim­u­lus in store at ECB meet

Kuwait Times - - BUSINESS -

BERLIN: The ECB will roll out its big guns at its mon­e­tary pol­icy meet­ing this week, ramp­ing up its tril­lion-euro as­set pur­chases and cut­ting key rates to hike weak in­fla­tion, an­a­lysts said.

Fed up with an in­fla­tion rate that is stub­bornly far be­low the tar­get of close to 2.0 per­cent, Euro­pean Cen­tral Bank chief Mario Draghi has in re­cent weeks mul­ti­plied pledges to “do what we must” to lift con­sumer prices in the 19-mem­ber eu­ro­zone.

In what was viewed as an at­tempt to lay out his case for more stim­u­lus, Draghi also pre­sented a mo­rose state of the econ­omy at a bank­ing con­fer­ence ear­lier this month.

“We can­not yet say with con­fi­dence that the process of eco­nomic re­pair in the euro area is com­plete,” he said, not­ing that global growth is ex­pected to be the weak­est since 2009, while the re­bound in the eu­ro­zone is the low­est since 1998. For Jonathan Loynes, an an­a­lyst at Cap­i­tal Eco­nomics: “The ques­tion is not whether the ECB’s gov­ern­ing coun­cil will loosen mon­e­tary pol­icy at its meet­ing on De­cem­ber 3rd, but rather whether it will do so de­ci­sively enough to meet the very strong expectations stoked up by its own dovish sig­nals.”

“Any­thing less than a marked ac­cel­er­a­tion in the pace of its monthly as­set pur­chases and a sig­nif­i­cant cut in its de­posit rate would now come as a se­vere dis­ap­point­ment,” he said. The ECB launched in March a 1.1-tril­lion-euro ($1.2 tril­lion) scheme to help lift con­sumer prices.

The quan­ti­ta­tive eas­ing pro­gram to buy sov­er­eign bonds at a rate of 60 bil­lion eu­ros a month runs un­til at least Septem­ber 2016, but in­fla­tion came in at zero in Oc­to­ber. At the ECB board’s last meet­ing on Oc­to­ber 22, the ques­tion of whether to cut in­ter­est rates again sur­faced as a po­ten­tial tool to boost con­sumer prices.

The ECB had cut the rate on its de­posit fa­cil­ity-that is, for funds placed by banks at the cen­tral bank, to neg­a­tive 0.2 per­cent in June 2014. That means banks have to ac­tu­ally pay the cen­tral bank to hold their cash, thus en­cour­ag­ing them to lend. The rate has re­mained at that level since.

Dis­senters shrugged off

Draghi’s ex­pan­sion­ist stance is not with­out de­trac­tors, with Bun­des­bank pres­i­dent Jens Wei­d­mann warn­ing against hastily boost­ing stim­u­lus rather than let­ting the cur­rent pack­age do its work.

But the dis­senters “ap­pear to have had lit­tle in­flu­ence on their col­leagues,” said Loynes. Beren­berg an­a­lyst Hol­ger Sch­mied­ing also said that “ex­pe­ri­ence tells us that the ECB coun­cil usu­ally fol­lows Draghi’s lead in such con­tentious dis­cus­sions”. “With no in­fla­tion risks what­so­ever, a fur­ther stim­u­lus would cer­tainly do no dam­age even if the ben­e­fits may not be very pro­nounced ei­ther,” he said.

The cur­rent bout of weak in­fla­tion is un­der­pinned by per­sis­tently low petrol prices. Cen­tral bankers of the 19mem­ber eu­ro­zone are keen to fight fall­ing prices be­cause they can be poi­sonous for the econ­omy, cre­at­ing a vi­cious cir­cle of fall­ing de­mand and fewer jobs.

While fall­ing prices might ap­pear to be good for con­sumers, de­fla­tion can be­come en­trenched if con­sumers de­lay pur­chases in the hope of lower prices later, which in turn prompts com­pa­nies to hold off in­vest­ment. For Com­merzbank’s chief econ­o­mist Jo­erg Krae­mer, the ECB may sim­ply “make a de­ci­sion in prin­ci­ple... and de­fer the clar­i­fi­ca­tion of fur­ther de­tails to a later meet­ing”.

“The ECB’s main ob­jec­tive is prob­a­bly to achieve the strong­est pos­si­ble ef­fect on the mar­kets. To do so, the mar­kets must be con­vinced that the ECB is do­ing all it can to achieve its in­fla­tion ob­jec­tive,” said Krae­mer.

The bank is there­fore likely to meet mar­ket expectations of more stim­u­lus, as well as “an­nounce fur­ther steps in the case that its ob­jec­tives run the risk of not be­ing achieved”. — AFP

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