Eurozone Monetary Policy


Eurozone: ECB keeps rates unchanged, hints at further measures in coming months

November 6, 2014

The European Central Bank (ECB) decided to keep the main refinancing rate unchanged at the record low of 0.05% at its most recent meeting, which took place on 6 November. The ECB also kept the deposit rate—the rate banks receive for parking funds at the ECB—at minus 0.20% and left the marginal lending rate at 0.30%. Market analysts had anticipated the Bank’s decision to maintain the rates unchanged.

The decision came amid a broadly unchanged outlook for the European economy. Growth momentum is weakening, but a modest recovery is still expected. Risks to the outlook remain on the downside and are related to heightened geopolitical risks, which could, “dampen confidence and, in particular, private investment,” and to insufficient implementation of structural reforms by EU Member States. On the inflation side, the Bank acknowledged the slight pick-up in inflation in October due to a “less negative” contribution from energy prices. Once again the ECB did not mention anchored inflation expectations, which suggests that the Bank is still worried about price developments in the medium term.

Regarding the asset-backed securities (ABS) and covered bond purchase programs, the ECB announced that it started purchasing covered bonds in October as planned. The ABS purchases that were supposed be under way by November have begun. This time the ECB provided an indication of the size of the purchase program. According to the ECB, “[t]ogether with the series of targeted longer-term refinancing operations to be conducted until June 2016, these asset purchases will have a sizeable impact on our balance sheet, which is expected to move towards the dimensions it had at the beginning of 2012.” In the press conference following the monetary policy statement, ECB President Mario Draghi specified that “the beginning of 2012” refers, in fact, to March 2012. Meeting this target would mean that the ECB has to operate asset purchases for a total of at least EUR 1.0 trillion.

Looking forward, the ECB appears open to adopting further unconventional measures, including purchases of sovereign bonds, should the inflation outlook to deteriorate further. According to the ECB’s statement, “the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate,” and work is under way to ensure, “timely preparation of further measures to be implemented, if needed.” Draghi stressed this point further in an official speech at the European Banking Congress on 21 November. He emphasized that, “a too prolonged period of low inflation becomes embedded in inflation expectations,” and added that the ECB will do what is needed to raise inflation and inflation expectations “as fast as possible”. Moreover, if the current policy stance is not sufficient to achieve this objection, the ECB, “would step up the pressure and broaden even more the channels through which [it intervenes], by altering accordingly the size, pace and composition of [..] purchases.”

Within this setting, FocusEconomics panelists expect the policy rate to end 2014 at 0.14% and 2015 at 0.23%.

Author:, Head of Data Solutions

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