Eurozone Monetary Policy


ECB makes surprise cut as low inflation threatens recovery

At its 7 November meeting, the European Central Bank (ECB) cut the refinancing rate by 25 basis points to a new record low of 0.25% in a decision that came as a surprise to market analysts. The ECB also cut the lending rate by the same amount, to 0.75%, while leaving the deposit rate unchanged at zero. Finally, the ECB announced that it would conduct all its refinancing operations as, "fixed tender procedures with full allotment," by mid-2015 at the latest. This means that lenders across the region will be able to access ECB liquidity in exchange for appropriate collateral without limits for another year-the deadline had been set at mid-2014 previously.

The decision was primarily a reaction to the plunge in inflation in recent months, which threatens to cripple economic recovery in the region. The slowdown in inflation stems largely from a moderation in prices for food and energy, as well as from, "some weakening in services price inflation." The ECB believes that, "we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2.0% later on." In this respect, the ECB reiterated that risks to the inflation outlook will remain broadly in balance over the medium term.

Meanwhile, the ECB did not make major changes to the previous meeting's economic assessment. The Euro area economy exited recession in the second quarter and recent survey indicators point to continued growth in the third, albeit at a slower pace. Regarding future developments, the ECB reiterated its expectations for a "gradual recovery" in the region. Risks to the outlook remain on the downside and are related to, "developments in global money and financial market conditions and related uncertainties," which, "may have the potential to negatively affect economic conditions."

Monetary authorities reiterated the forward guidance adopted in July, stating that the refinancing rate will remain, "at present or lower levels for an extended period of time." Against a scenario of protracted low inflation in the coming months, monetary policy, "will remain accommodative for as long as necessary," in order, "to assist the gradual economic recovery." Within this setting, FocusEconomics panelists expect the policy rate to end 2013 at 0.46% and 2014 at 0.48%.

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Euro Monetary Policy November 2013

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