ECB sees increased risks amid pre-emptive action call
Growth and inflation risks are on the rise in the euro area, the minutes of the European Central Bank's January meeting showed, and some policymakers are advocating the need to act pre-emptively in the face of new threats. Low inflation could become embedded, with poor wage growth already suggesting that weak crude prices are feeding into other prices, while China's turmoil was also clouding the outlook as the risk of a hard landing for its economy rose, the ECB said on Thursday. The ECB's net profit increased in 2015, due to income the sale of securities and its ability to recover operating expenses related to its role as banking supervisor.
The ECB said in a statement its 2015 bottom-line net profit amounted to 1.082 billion euros ($1.2 billion), up from 989 million euros a year earlier. "Higher realised gains from the sale of securities in 2015 contributed to this increase," the statement said.
Although the ECB left rates unchanged in January, it promised to review and possibly recalibrate its policies on March 10, a state- ment understood by markets to mean that policy easing is highly likely. Analysts polled by Reuters expect a 10 basis point deposit rate cut and a tweak of the ECB's 1.5 trillion euro asset buying programme in March, while markets see more than 20 basis points worth of rate cuts this year. "There were stronger signs again that repeated downward revisions of the inflation outlook were feeding through to inflation expectations, which had again increased the probability of the euro area economy remaining in low inflation environment for an extended period of time," the ECB said in the minutes of the Jan. 21 meeting. "Weaker than anticipated growth in wages, in conjunction with declining inflation expectations, could also signal increased risks of second-round effect," it said. The ECB is trying to push inflation, now running around zero, back towards 2 per cent but low energy prices, lacklustre growth and weak lending growth are expected to keep inflation well below target for years to come.
Although countering an oil price shock is difficult, the ECB is fighting the so-called second-round effect of the oil price fall, fearing that low inflation could become embedded. "A 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 pre-emptively ... rather than wait until after risks have fully materialised,"
the ECB said.