Eurozone Monetary Policy January 2016

Eurozone

Eurozone: ECB stays put in January meeting, but hints at more stimulus in March

January 21, 2016

Following a round of monetary stimulus in December, which included a 10-basis-point cut to the deposit rate and an extension of the asset purchase program (APP) through March 2017 or beyond if necessary, the European Central Bank (ECB) announced that it would leave unchanged the refinancing rate, the marginal lending rate and the deposit at 0.05%, 0.30% and minus 0.30%, respectively. Regarding the APP, also known as quantitative easing (QE), the ECB signaled no changes to the program, saying that the monthly asset purchases of EUR 60 billion remain appropriate. According to the Bank, the program continues to have a favorable impact on the European banking system and thus on the economy as a whole. All decisions were expected by the markets.

The ECB did, however, maintain the prospect of further easing in March in response to increasing downside risks, amid heightened global financial volatility and uncertainty regarding the economic outlook of key emerging economies, as well as due to geopolitical risks. In this meeting, the ECB reintroduced its forward guidance on monetary policy rates, saying that it expects them, “to remain at present or lower levels for an extended period of time.” Regarding the January meeting, Carsten Brzeski, Chief Economist at ING Bank stated:

“What was expected to be a dull first meeting of the year, turned out to be an exciting ECB meeting with ECB president Mario Draghi opening the door widely for new ECB action in March. While today’s ECB meeting will again feed bold speculations about what could happen in March, the question remains whether Draghi will really be able to deliver on his promise.”

The ECB, which underwhelmed investors in December with a smaller-than-expected stimulus package, stated that Eurozone inflation dynamics continue to be weak and that risks to the growth outlook for the 19-nation Euro area remain on the downside, and that they have the potential to impact the region’s external sector and weigh on confidence. European monetary authorities stated that the China-led slowdown in emerging markets and the 40% decrease in global oil prices since the beginning of the year would choke inflation within the region in 2016. Consequently, the ECB signaled that, on the basis of current oil futures prices, the evolution of inflation in the Eurozone is lower than previously expected and that a more comprehensive picture of what impact oil prices and other external and domestic factors will have on the outlook for HICP inflation will become available in March.

Regarding the ECB’s comments on the impact of oil prices on the Eurozone’s inflation outlook, Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank stated:

“Based on the current forward oil price, the ECB could in our view lower its headline inflation forecast for 2016 to 0.2% from 1.0% and the 2017 forecast to 1.3% from 1.6%. An important question is, what the ECB will expect for inflation in 2018, but given Draghi's dovish comments today and the focus on the risk of second-round effects from the oil price decline, we believe the ECB is ready to act again.”

Within this setting, all but one 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 2016. For next year, analysts expect the ECB to gradually lift interest rates. The Consensus view is that the main refinancing rate will end 2017 at 0.09%.


Author:, Senior Economist

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Euro Monetary Policy January 2016 0

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


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