Euro­pean Cen­tral Bank set to in­crease mon­e­tary dose

The Pak Banker - - FRONT PAGE -

The Euro­pean Cen­tral Bank will al­most cer­tainly an­nounce new stim­u­lus mea­sures at its pol­icy meet­ing next week, an­a­lysts said, as eu­ro­zone in­fla­tion turned neg­a­tive and the eco­nomic out­look con­tin­ues to cloud over. Af­ter dis­ap­point­ing fi­nan­cial mar­kets with what were widely to per­ceived as half-hearted mea­sures in De­cem­ber, ECB chief Mario Draghi will an­nounce bolder pol­icy moves this time round, cen­tral bank watch­ers pre­dicted. Th­ese were most likely to in­clude a fur­ther cut in in­ter­est rates, an in­crease in the vol­ume of bonds it buys each month un­der its so-called quan­ti­ta­tive eas­ing or QE pro­gramme and a fur­ther ex­ten­sion of that mea­sure be­yond its cur­rent time­frame of March 2017. "The ECB has sig­nalled a fur­ther loos­en­ing of mon­e­tary pol­icy at its forth­com­ing meet­ing," said Cap­i­tal Eco­nom­ics econ­o­mist Jonathan Loynes.

"And while De­cem­ber's un­der-de­liv­er­ance high­lights the risk of an­other dis­ap­point­ment, the de­te­ri­o­rat­ing eco­nomic out­look should per­suade the gov­ern­ing coun­cil to be bolder this time," the ex­pert said. With area-wide in­fla­tion back in neg­a­tive ter­ri­tory-it fell to mi­nus 0.2 per cent in Fe­bru­ary for the first time in five months and eu­ro­zone growth not ex­pected to pick up any time soon, the case for fur­ther stim­u­lus mea­sures is clear, said Beren­berg Bank econ­o­mist Hol­ger Sch­mied­ing. "Amid height­ened un­cer­tainty about the world econ­omy, ris­ing political risks in Europe and re­newed con­cerns about the health of the Euro­pean bank­ing sys­tem, fi­nan­cial volatil­ity will likely im­pair the trans­mis­sion of the ECB's cur­rent mon­e­tary stim­u­lus to the real econ­omy for a while," Sch­mied­ing said.

"To bring the econ­omy back to trend growth none­the­less, the ECB needs to do more." Cap­i­tal Eco­nom­ics' Loynes pre­dicted a cut in the key de­posit rate from mi­nus 0.30 per cent to mi­nus 0.5 per cent and an in­crease in the monthly QE pur­chases from 60 bil­lion euros ($66 bil­lion) to 80 bil­lion euros.

The de­posit rate is the in­ter­est the ECB usu­ally pays banks for the ex­cess liq­uid­ity they park with it overnight. But it has been neg­a­tive since June 2014, mean­ing the ECB ef­fec­tively charges the banks for us­ing the fa­cil­ity in the hope that they will in­stead lend it out to busi­nesses and com­pa­nies to get the econ­omy mov­ing. How­ever, banks com­plain the cur­rently ul­tra-low in­ter­est rate en­vi­ron­ment is erod­ing prof­its and push­ing the de­posit fur­ther into neg­a­tive ter­ri­tory could harm them fur­ther still.

Com­merzbank econ­o­mist Michael Schu­bert sug­gested the ECB might there­fore in­tro­duce a tiered in­ter­est rate scheme to ease the bur­den on banks, whereby lenders would pay a lower or no penalty rate at all up to a spec­i­fied amount of ex­cess liq­uid­ity. "A tiered in­ter­est rate would prob­a­bly send a clearer sig­nal, as mon­e­tary pol­icy does not only de­pend on the size of the rate cut, but also on the scale of pos­si­ble ad­di­tional ac­tion," Schu­bert ar­gued.

"If a tiered rate sys­tem were in­tro­duced, the bur­den on banks would rise less strongly and the de­posit rate could be cut more sharply than if the ECB stuck to a uni­ver­sal penalty rate." But Beren­berg Bank's Sch­mied­ing said Draghi might have dif­fi­culty com­mu­ni­cat­ing such a move to the mar­kets. "It could be tech­ni­cally dif­fi­cult to de­fine the di­vid­ing line be­tween 'nor­mal' and 'ex­cess' de­posits," he said. Fur­ther­more, "com­mu­ni­cat­ing to mar­kets a de­ci­sion that cuts one in­ter­est rate (on ex­cess de­posits) while rais­ing an in­ter­est rate at the same time (re­duced penalty for 'nor­mal' de­posits) could tax even Draghi's pre­sen­ta­tion skills quite se­verely," Sch­mied­ing said. A num­ber of gov­ern­ing coun­cil mem­bers, no­tably Bun­des­bank chief Jens Wei­d­mann, are op­posed to ad­di­tional stim­u­lus mea­sures.

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