Eurozone Monetary Policy


ECB maintains dovish stance, hints at re-examination of policy in December meeting

European monetary authorities were prompted to rethink monetary policy at their latest meeting as concerns about the Eurozone’s economic prospects have arisen due to the combination of lackluster economic growth in the common-currency bloc, falling commodities prices and growing risks about the state of emerging economies. The European Central Bank (ECB) held its seventh monetary policy meeting on 22 October in Malta, during which it announced that it will maintain the main refinancing rate unchanged at 0.05% and leave the marginal lending rate and the deposit rate unchanged at 0.30% and at minus 0.20%, respectively. The ECB also stated that non-standard monetary policy measures, namely the asset purchase program, also known as quantitative easing (QE), are proceeding “smoothly” and thus firms and households continue to benefit from more favorable conditions from the cost and availability of credit.

While no major decisions were taken during this meeting, the ECB did sound more concerned about the economic outlook for the Eurozone and therefore stated that it is willing to act. According to ECB President Mario Draghi, domestic demand remains resilient, but a deterioration in emerging market economies, coupled with low commodities prices and global financial volatility, are likely to have a repercussion on economic growth and, most notably, on the inflation outlook. In this context, President Draghi stated that, “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting, when the new Eurosystem staff macroeconomic projections will be available.”

Regarding the ECB‘s intention to revise its monetary policy, Carsten Brzeski, Chief Economist at ING commented:

“Obviously, it is hard not to see the ECB’s intention to add more monetary stimulus. Still, the ruthlessness with which Draghi sometimes tried to defend the ECB’s position was a bit surprising. In fact, the ECB is still only one third into its envisaged QE purchases and the discussion on whether low (or even negative) inflation rates are now a curse or a gift for the Eurozone remains unclear. Furthermore, it is also far from certain that the marginal gains from stepping up QE are still positive. Judging from the immediate market reaction, stepping up QE should at least weaken the euro somewhat. In our view, probably the biggest and most important goal of the ECB as it would deliver almost instant success. Even though Draghi repeated the ECB’s well-known position that the exchange rate was obviously not a policy target for the ECB.”

European monetary policy makers emphasized that they will continue to carry out the monthly asset purchases of EUR 60 billion, which are intended to run until September 2016. That said, as recent inflation data suggest, severe disinflationary pressures persist in the economy, which points to a protracted period of disinflation—if not deflation—in the coming months. In that case, monetary authorities underlined that they could extend the purchases beyond September 2016.

Within this setting, almost all of the analysts FocusEconomics surveyed expect the ECB to maintain the policy rate unchanged at the current record-low of 0.05% over the course of the next two years.

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Eurozone Monetary Policy Chart

Euro Monetary Policy October 2015

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).

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