ECB holds rates, seen
charting course to more easing in December
Send a link to a friend
[October 20, 2016]
By Francesco Canepa and Balazs Koranyi
FRANKFURT
(Reuters) - The European Central Bank kept interest rates and policy
guidance unchanged on Thursday but may lay the groundwork for more
easing to come in December as it tries to sustain a long-awaited rebound
in consumer prices.
Holding interest rates deep in negative territory and maintaining bond
purchases at 80 billion euros per month, ECB President Mario Draghi is
likely to emphasize later at a news conference the continued need for
monetary stimulus, reinforcing expectations for an extension of the
ECB's asset buys beyond its scheduled end next March.
The ECB has provided unprecedented stimulus for years with sub-zero
rates, free loans to banks and over a trillion euros in bond purchases,
all in the hope of reviving growth and lifting inflation back to its
target of just below 2 percent after more than three years of misses.
In a widely expected decision on Thursday, Draghi kept the deposit rate
at minus 0.4 percent and maintained the ECB's guidance for rates to stay
at their current or lower levels for an extended period. Attention now
turns to the news conference at 1230 GMT (0830 EDT), with markets
looking for fresh hints about its expected move in December.
![](http://archives.lincolndailynews.com/2016/Aug/26/images/ads/current/best_friends_sda_120215.png)
The trick for Draghi will be to keep the door firmly open to more
stimulus without any hint of commitment that could rattle markets and
lead to a repeat of turbulence set off last year, when the ECB raised
expectations too high and did not fully deliver on them.
Action is far from urgent, however. The euro zone economy is chugging
along, inflation is at a two-year high, national budget proposals
suggest a bit more fiscal support, and the early impact on euro zone
economies of Britain's decision to leave the European Union has been
muted. All these suggest that the 19-country bloc is on the path
predicted by the ECB in September.
But Draghi and fellow board members have gone to pains in recent weeks
to emphasize that this outlook is predicated on "very substantial"
monetary support, a hint taken as confirmation that an extension is
coming.
Indeed, ECB chief economist Peter Praet has warned that a premature
withdrawal of stimulus would stall and reverse the upswing, a further
sign any tapering is well into the future.
"Present loose (financial) conditions also reflect expectations of
additional ECB action, this suggests that the ECB will have to do more
just to preserve the current degree of accommodation," UniCredit
economist Marco Valli said prior to the rate decision.
"Therefore, anything less than quantitative easing extension at 80
billion euros per month risks tightening financial conditions via higher
yields, a stronger currency and, possibly, lower risk appetite."
The ECB's 1.74 trillion euro quantitative easing (QE) scheme is now set
to expire in March but the bank has always said that it would run until
it saw a sustained recovery in inflation.
![](http://archives.lincolndailynews.com/2016/Aug/26/images/ads/current/directory_buttons.png)
[to top of second column] |
![](../images/102016pics/busine32.jpg)
The headquarters of the European Central Bank (ECB) are pictured in
Frankfurt, Germany, September 8, 2016. REUTERS/Ralph Orlowski/File
Photo
![](http://archives.lincolndailynews.com/2016/Oct/20/images/ads/current/st_claras_lda_082114.png)
Analysts polled by Reuters unanimously expect unchanged rates with the
vast majority predicting a three to six month extension to asset buys in
December.
WEAK INFLATION
The root of the problem is that inflation is still too weak and may not hit the
target for another 2-3 years at the earliest.
Though it rose to 0.4 percent last month and may exceed 1 percent by the spring,
the rise is due almost entirely to the fading impact of a drop in oil prices and
not a rebound in underlying prices.
Wage growth meanwhile remains weak, core inflation is stuck below 1 percent and
unemployment is high, suggesting that the rise is far from the sustained
increase the ECB had hoped for.
Lending growth is also showings signs of leveling off, suggesting that banks may
be struggling to pass on some of the ECB's ultra loose policy measures.
Indeed, policymakers are increasingly emphasizing the negative side effects of
sub zero rates, particularly for banks, suggesting that another rate cut may not
be among the options to be discussed in December.
The ECB relies on banks to transmit its policy measures but low rates are
hurting margins and depressing share prices, likely leading to a curb on
lending.
Any meaningful extension of asset buys will however require the ECB to modify
some of the program's technical constraints to counter the scarcity of some
assets, like German bonds.
![](http://archives.lincolndailynews.com/2016/Oct/20/images/ads/current/advcarpet_lda_FHI_2016.png)
Those changes could include relaxing some of the ECB's self-imposed constraints,
like the rule prohibiting the bank to buy assets yielding less than its deposit
rate or the rule requiring it to buy assets in proportion to each country's
shareholding in the ECB.
(Editing by Jeremy Gaunt)
[© 2016 Thomson Reuters. All rights
reserved.] Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |