ECB chief eyes March pol­icy re­view as eco­nomic risks grow

The Pak Banker - - COMPANIES/BOSS -

Tur­moil in fi­nan­cial mar­kets and con­cerns over China and other emerg­ing mar­kets will prompt a March re­view of the Euro­pean Cen­tral Bank's mon­e­tary pol­icy, Pres­i­dent Mario Draghi said to­day, hold­ing out the prospect of fur­ther loos­en­ing. The euro eased against the dol­lar as Draghi, told re­porters the Bank ex­pected rates to "stay at present or lower lev­els for an ex­tended pe­riod of time".

"As we start the new year, down­side risks have in­creased again amid height­ened un­cer­tainty about emerg­ing mar­ket economies' growth prospects, volatil­ity in fi­nan­cial and com­mod­ity mar­kets and geopo­lit­i­cal risks," he said.

"It will there­fore be nec­es­sary to re­view and pos­si­bly re­con­sider our mon­e­tary pol­icy stance at our next meet­ing in early March," he said, cre­at­ing po­ten­tial for ear­lier ac­tion than many in the mar­ket had ex­pected. Many an­a­lysts had been pre­dict­ing a fur­ther 10-ba­sis-point cut in the ex­ist­ing -0.30 de­posit rate, but not un­til the June meet­ing of the Bank's poli- cy­mak­ers. In De­cem­ber, the ECB Gov­ern­ing Coun­cil cut the de­posit rate, in­creased the charge on banks for park­ing money at the ECB, and ex­panded its €1.5 tril­lion ($1.6 tril­lion) quan­ti­ta­tive eas­ing pro­gramme to buy chiefly govern­ment bonds.

De­fend­ing the mea­sures, which fell short of some in­vestors' ex­pec­ta­tions, Draghi said they were "en­tirely ap­pro­pri­ate and ef­fec­tive" given what was known at the time, point­ing out that the price of oil had slumped no less than 40 per cent since. The ECB's De­cem­ber pro­jec­tions were based on crude oil prices av­er­ag­ing $52.2 this year, but Brent crude is trad­ing around $27 per bar­rel and even 2022 oil fu­tures are below $50, in­di­cat­ing lit­tle con­fi­dence in a quick re­bound.

"We are not sur­ren­der­ing in front of th­ese global fac­tors," he said, not­ing that lower en­ergy costs should also serve to boost house­hold con­sump­tion and in­vest­ment. While Draghi in­sisted the euro area re­cov­ery was mov­ing ahead, he ac­knowl­edged that risks to its out­look "re­main on the down­side", cit­ing the fragility of the global econ­omy and geopo­lit­i­cal risks.

The fur­ther dilemma for the Bank is that low en­ergy prices are now im­pact­ing other goods and ser­vices, push­ing even core in­fla­tion far from the bank's goal of close to 2 per cent and jeop­ar­dis­ing the cred­i­bil­ity of that tar­get.

"In­fla­tion rates are cur­rently ex­pected to re­main at very low or neg­a­tive lev­els in the com­ing months and to pick up only later in 2016," he said.

The weak­en­ing yuan would ex­port China's de­fla­tion­ary risk and re­duce the ef­fec­tive­ness of any rate cuts by lim­it­ing the ECB's abil­ity to weaken the euro.

Weak­ness in China could also per­suade the US Fed­eral Re­serve to slow its rate in­creases, also putting the euro un­der firm­ing pres­sure.

De­spite tur­moil on fi­nan­cial mar­kets, how­ever, Draghi said he was rel­a­tively con­fi­dent the Eu­ro­zone's bank­ing sys­tem was strong. "So far, we have seen that they (the banks) stand pretty re­silient," he said. "We have not seen the po­ten­tial for in­sta­bil­ity the likes of which we saw in the pre­cri­sis times," Draghi said.

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