Eurozone: ECB maintains dovish stance, likely to extend QE program beyond September 2016
September 3, 2015
The European Central Bank (ECB) held its sixth monetary policy meeting on 3 September during which it announced that it will leave the main refinancing rate unchanged at 0.05% and maintain the deposit rate and the marginal lending rate at minus 0.20% and 0.30%, respectively. All decisions were in line with market expectations. Regarding non-standard monetary policy measures, the ECB stated that the asset purchase program, “continues to proceed smoothly,” while raised national banks’ asset purchase limits from the initial limit of 25% to 33%. This limit refers to each individual bond eligible for ECB purchase, while there was no discussion regarding rising the issuer limit.
Looking at the ECB’s assessment of the economy, European monetary authorities noted that the Eurozone economy continues to recover, but that it built up less momentum in Q2 than it had previously expected and the latest data indicate that the pace of growth will remain soft in the second half of this year. Regarding consumer price developments, the Bank underlined that inflation continues to increase, although at a slower than expected pace. The Central Bank also recognized that renewed downside risks to the economic outlook for the common-currency block as well as for its inflation prospects have emerged. The Bank noted that the sharp slowdown in emerging economies observed recently is weighing on global growth and, consequently, on external demand for European exports. On the domestic front, the Bank stated that domestic demand will still be supported by lower oil and energy prices as well as by the Bank’s monetary policy measures designed to have a positive impact on financial conditions for households and businesses.
The ECB revised its macroeconomic projections down marginally. The Central Bank now sees the Eurozone economy expanding 1.4% in 2015, which was down from its previous 1.5% estimate. For 2016, the ECB expects the economy to grow 1.7%, which is also down from the 1.9% expansion it had expected. Moreover, the inflation outlook was also revised. The Bank projects HICP inflation to average 0.1% this year, which is down from the previous 0.3% estimate. For 2016, European monetary authorities see the inflation rate picking up to 1.1% (previous estimate: 1.5%). The ECB noted that the downward revisions to its forecasts largely reflect weaker external demand owing to soft growth in emerging economies and lower oil prices.
While the ECB emphasized that it will continue to fully implement its monthly asset purchases of EUR 60 billion, the Bank will closely monitor all relevant economic information in order to act by using all instruments available within its mandate. Monetary authorities said that these purchases, “are intended to run until the end of September 2016, or beyond, if necessary, and, in any case, until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”
Author: Ricardo Aceves, Senior Economist