Eurozone: ECB announces package of measures aimed at easing monetary policy further
December 3, 2015
At its last monetary policy of 2015, the European Central Bank (ECB) announced a package of measures that are intended to ease monetary policy in order to increase inflation to its target of below, but close to 2.0%, and to anchor medium-term inflation expectations. At the 3 December meeting, the ECB announced that it would cut the deposit rate by 11 basis points to minus 0.30% and leave the refinancing rate and the marginal lending rate unchanged at 0.05% and 0.30%, respectively.
Regarding the non-standard monetary policy measures, namely the asset purchase program (APP), also known as quantitative easing (QE), the Central Bank decided to extend the program by at least six more months in order to counter “heightened uncertainties" in the global economy that could weigh on the Eurozone’s economy and confidence. The monthly purchases mainly of government bonds worth EUR 60 billion was launched in January 2015 and was intended to continue running until September 2016. The program has now been extended through March 2017 or beyond, if necessary, until there is a sustained change in the evolution of inflation.
The Central Bank also announced that it would reinvest the payments it receives from the securities purchased under the APP and that it would also broaden the type of assets purchased to include regional and local government bonds in addition to sovereign bonds. Finally, the Bank will continue to conduct the main refinancing operations for banks as a fixed rate tender with full allotment for as long as necessary, or at least until end of 2017.
The ECB took these decisions as the Bank was more concerned about the inflation outlook for the Eurozone. The Bank indicated that downside risks to the outlook have increased and that the persistence of low inflation rates reflects, “sizeable economic slack weighing on domestic price pressures and headwinds from the external environment.” In its latest forecasts, the Bank maintained its 2015 inflation forecast at 0.1% and cut the 2016 forecast to 1.0% from its projection of 1.1% in September. The 2017 forecast was also reduced from 1.7% to 1.6%.The market’s reaction to the measures was significant, as German 11-year bunds yields jumped, the euro weakened further and European equities fell. Meanwhile, there was no explicit communication about the potential for further deposit rate cuts, but ECB President Mario Draghi did clarify that, “the cut we decided today is adequate, period.”
Moreover, the announcement of a broad package of measures implies that there is unlikely to be a rush towards further monetary easing—at least in the absence of a significant shock. Heading into 2016, inflation remains at very low levels and the ECB’s focus now is on inflation expectations and policy credibility. The ECB also stated it would remain alert to upcoming inflation data as well as to how financial conditions develop in the region. The majority of analysts agree it remains to be seen whether the latest policy actions will be sufficient to anchor medium-term inflation.
Author: Ricardo Aceves, Senior Economist