ECB sees in­creased risks amid pre-emp­tive ac­tion call

The Pak Banker - - FRONT PAGE -

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.

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