ECB de­bated pre­emp­tive ac­tion to counter ris­ing global risks

The Pak Banker - - COMPANIES/BOSS -

Euro­pean Cen­tral Bank pol­icy mak­ers meet­ing in Jan­uary de­bated whether the risk of a global slow­down war­ranted pre­emp­tive mon­e­tary stim­u­lus, and at least one Gov­ern­ing Coun­cil mem­ber saw a need to over­shoot the cen­tral bank's in­fla­tion goal for a "lim­ited pe­riod." "The point was made that, in a sit­u­a­tion in which risks were pre­dom­i­nantly on the down­side and new down­side risks were emerg­ing, it would be prefer­able to act pre­emp­tively, tak­ing emerg­ing risks into ac­counts, rather than wait un­til af­ter risks had fully ma­te­ri­al­ized," an ac­count of the meet­ing pub­lished on Thurs­day showed. "How­ever, a re­mark was made cau­tion­ing against adopt­ing an ex­plicit risk-based ap­proach to mon­e­tary pol­icy, driven largely by 'in­sur­ance'." ECB Pres­i­dent Mario Draghi said af­ter the Jan. 21 gath­er­ing that the cen­tral bank agreed to "re­view and pos­si­bly re­con­sider" its pol­icy at its next meet­ing on March 10. In­fla­tion in the re­gion has fallen short of the ECB's goal of just un­der 2 per­cent for al­most three years, and cur­rent stim­u­lus now risks be­ing un­der­mined by an emerg­ing-mar­ket slow­down and a sell-off in bank stocks that threat­ens to de­press credit. Coun­cil mem­bers ex­pressed con­cern that the im­pact of a re­newed slump in oil prices was spread­ing through the 19-na­tion econ­omy, adding to the risks that low in­fla­tion was be­com­ing in­grained.

"Wage dy­nam­ics could point to in­cip­i­ent signs of se­cond-round ef­fects, whereby wage dy­nam­ics be­come in­creas­ingly driven by past in­fla­tion rates," the ac­count showed. "It was to be ex­pected that such di­rect and in­di­rect ef­fects of lower en­ergy prices would be fur­ther trans­mit­ted through var­i­ous com­po­nents" of head­line in­fla­tion and "could thus have an im­pact on core in­fla­tion." The Gov­ern­ing Coun­cil raised the pos­si­bil­ity that once it does achieve its in­fla­tion goal, it could let con­sumer prices rise at an even faster rate for a while, cit­ing the ' sym­me­try" of its com­mit­ment.

"A view was put for­ward" that "it ap­peared log­i­cal from a medium-term per­spec­tive for the Gov­ern­ing Coun­cil, af­ter a pro­longed pe­riod of un­der­shoot­ing of its in­fla­tion aim, to con­sider a lim­ited pe­riod of over­shoot­ing in fu­ture," ac­cord­ing to the ac­count. Coun­cil mem­bers also dis­cussed the role of the euro ex­change rate, not­ing that while it con­tin­ued to play an "im­por­tant role" in trans­mit­ting the ECB's stim­u­lus, it "had weak­ened ow­ing in par­tic­u­lar to the de­pre­ci­a­tion of the cur­ren­cies of emerg­ing mar­ket economies."

The ECB mea­sure of the sin­gle cur­rency's real trade-weighted ex­change rate was at 111.62 as of Feb. 17, up from 111.12 on Jan. 21 and 105.91 on Dec. 3, the date of the pre­vi­ous pol­icy meet­ing. It reached 113.26 on Feb. 11, the high­est level in over a year.

In De­cem­ber the ECB cut its de­posit rate to mi­nus 0.3 per­cent, ex­tended its quan­ti­ta­tive-eas­ing pro­gram to at least March 2017, and pledged to rein­vest the prin­ci­pal of the bonds it bought. In­vestors are pric­ing in a fur­ther rate cut in March and an­a­lysts have raised the prospect of an in­crease in QE pur­chases, cur­rently set at 60 bil­lion euros ($67 bil­lion) a month.

"Re­as­sur­ance was needed to be given that the Gov­ern­ing Coun­cil had a va­ri­ety of in­stru­ments at its dis­posal to re­spond to cir­cum­stances and that there was no limit to how far it was will­ing to de­ploy in­stru­ments within its man­date," the ac­count showed. There was also "wide agree­ment" that ECB com­mu­ni­ca­tion should avoid "com­pla­cency on the de­te­ri­o­rat­ing price out­look while also avoid­ing con­vey­ing an un­duly gloomy mes­sage" that could be self-ful­fill­ing. The Gov­ern­ing Coun­cil shared the view that the re­cent equity sell off in the bank­ing sec­tor was trig­gered "in large mea­sure" by "mis­per­cep­tions about on­go­ing su­per­vi­sory ac­tiv­i­ties" and that it was im­por­tant to counter the view that those would re­sult in "ad­di­tional pro­vi­sion­ing or cap­i­tal re­quire­ments."

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