Eurozone Monetary Policy September 2016


Eurozone: ECB holds rates; keeps QE program unchanged

September 8, 2016

Despite some expectations of an extension to the Quantitative Easing (QE) program, the European Central Bank (ECB) decided to stay the course and made no changes to its monetary policy at its 8 September meeting. The Bank decided to keep the refinancing rate, the marginal lending rate and the deposit facility rate steady at 0.00%, 0.25% and minus 0.40%, respectively. The ECB also maintained its asset purchase program at EUR 80 billion a month and reiterated that the program was intended to run until March 2017 or later, if needed.

Although the Bank decided to keep monetary policy steady, the ECB revised its growth forecast for next year down slightly. The ECB now sees the economy growing 1.6% in 2017, one percentage point lower than the previous forecast, but raised its GDP forecast for this year from a 1.6% expansion to a 1.7% increase. The downward revision for next year’s projection came largely on the back of the anticipation that foreign demand would be subdued, in part due to the UK’s vote for Brexit. However, at the accompanying press conference, ECB President Mario Draghi highlighted that the available data suggest that the Eurozone economy has shown resilience to the high degree of global economic and political uncertainty, yet risks to the outlook are titled to the downside. Draghi called on other policy makers at both the national and European levels to do more to spur growth in the Eurozone. Specifically, Draghi advocated the implementation of structural reforms and supportive fiscal policies, as long as they remain in compliance with EU regulations.

Looking forward, Draghi commented that the ECB expects rates to, “remain at present or low levels for an extended period of time, and well past the horizon of our net asset purchases.” Inflation continues to linger in what Draghi once called the “danger zone” of below 1.0%, although prices should pick up towards the end of the year as the base effect from low oil prices fades. The lack of inflationary pressures in the Euro area economy has led analysts to expect an extension of the ECB’s purchases program. Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank, points out that:

“Despite [the] decision to keep the QE purchase horizon unchanged, we believe the ECB will extend purchases by six months, at the meeting in either October or December. We expect this because of the lack of any upward trend in the underlying price pressure and the persistently low market-based inflation expectations. Related to this, we do not believe a sharp rise in inflation later this year would be enough for the ECB to end QE purchases, as, in our view, higher inflation would be driven mainly by the higher oil price.”

Regarding the ECB’s net asset purchases, Draghi added that, “the Governing Council tasked the relevant committees to evaluate the options that ensure a smooth implementation of our purchase programme.” While a number of analysts expect the QE program to be extended, it is unclear if it will be modified. The current program runs a risk of running into scarcity issues due to its technical restrictions.

Within this setting, all but one of the analysts surveyed by FocusEconomics expect the ECB to keep the policy rate unchanged at the current record-low of 0.00% this year and next. On average, our panelists see the rate ending 2016 and 2017 at minus 0.01%.

Author: Angela Bouzanis, Lead Economist

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Eurozone Monetary Policy Chart

Euro Monetary Policy September 2016 2

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

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