By Laurie Laird
FRANKFURT (MaceNews) – The European Central Bank unleashed a fresh wave of stimulus following Thursday’s rate-setting meeting, although the Bank’s renewed quantitative easing package fell short of expectations, with some council members dissenting from a decision to resume quantitative easing.
The interest rate on the ECB’s deposit facility will fall by 10 basis points to -0.5%, while Bank’s other main rates remain unchanged. The ECB also pledged to purchase euros20 billion in bonds per month from 1 November. Many private economists had called for a monthly bond-buying package of approximately euro40 billion, with Germany, the bloc’s biggest economy, teetering on the edge of recession.
However, the ECB softened the announcement by dramatically amending its forward guidance, promising to hold rates at current or lower levels, with no end date, until inflation has “robustly” converged at its target level of close to, but below 2%. At its July meeting, the Bank vowed to refrain from raising rates until the middle of 2020. Eurozone inflation steadied at an annual rate of 1.0% in August.
ECB President Mario Draghi conceded that governing council members expressed a “diversity of views” over the resumption of the bank’s asset purchase program, even as he found unanimous agreement for reducing rates and altering the council’s forward guidance. Despite some dissent, Draghi found “a clear majority” for resuming quantitative easing, adding that there “was no need to take a vote” on the measure.
Members were also united in strengthening their call for governments to do more to stir economic growth. President Draghi has consistently encouraged governments to expand fiscal stimulus, pointedly repeating such advice following Thursday’s meeting. “There was a unanimous consensus … namely that fiscal policy should become the main instrument” in enhancing growth. “It’s high time for the fiscal policy to take charge.”
The unexpected combination of dovish forward guidance and more hawkish quantitative easing was not necessarily designed to provide a flexible framework for a new regime at the ECB. “We are not creating the ground for my successor … the weakening [economic outlook] is more serious than expected. That was the basis of our decision today.”
Draghi will preside over his final meeting in the last week of October before giving way to former International Monetary Fund chief Christine Lagarde, who like Federal Reserve chief Jerome Powell, is a lawyer by training. That leaves Lagarde in charge of any future change in the limits of the ECB’s asset purchases, currently set at 33% of any country’s outstanding stock of debt. There was no discussion of examining those boundaries at Thursday’s meeting, according to Draghi. “There was no appetite to discuss the limits for one good reason. We have the relevant headroom to go on at this level without having to raise the limits.”
In line with weakening euro zone growth — gross domestic product expanded by a meager 0.2% in the second quarter, down from 0.4% in the previous three months — the ECB downgraded its forecasts to growth and inflation for this year and next. GDP is expected to grow by 1.1% in 2019, down from a forecast of 1.2% in June, while inflation will hit just 1.2% in 2019, below the June forecast of 1.4%. Persistently-low inflation has reduced the public’s inflation expectations to a range of between 1.0 and 1.5%, according to Draghi, “which is why we decided to act now.”
Draghi declined to be drawn into a war of words with U.S. President Donald Trump, but denied the president’s tweeted suggestion that the ECB’s rate cut was aimed at weakening the euro to boost European exports. Administration officials have hinted vaguely about future attempts to weaken to dollar to benefit U.S. exporters. “We are bound by the G20 consensus … and will not pursue a competitive devaluation,” Draghi said.
— Courtesy of MT Newswires