ECB to ‘re-examine’ stimulus policy

ECB headquarters in FrankfurtImage copyright

The European Central Bank (ECB) says it will “re-examine” its €1.1 trillion quantitative easing (QE) stimulus programme at its December meeting.

It has embarked on a scheme of bond purchases at €60bn per month designed to bring eurozone inflation back up.

But consumer prices fell by 0.1% in the euro area in September, prompting speculation there may be changes to the bank’s QE policy.

The comments came as the bank left its key interest rate unchanged at 0.05%.

‘Monetary policy accommodation’

“The asset-purchase plans are proceeding smoothly and continue to have a favourable impact,” bank head Mario Draghi told a news conference in Malta.

“The degree of monetary policy accommodation will need to be re-examined at our December meeting.”

The decision to leave the cost of borrowing unchanged was widely expected after the ECB cut rates to rock-bottom levels more than a year ago.

It kept the rate on bank overnight deposits at -0.2%, which means banks pay to keep funds at the central bank.

The ECB also held its marginal lending facility – or emergency overnight borrowing rate for banks – at 0.3%.

Inflation expectations

Mr Draghi added that the bank’s governing council had taken part in “a very rich discussion” on a number of areas of monetary policy, including a potential further cut in the rate charged to banks to leave money on deposit at the central bank.

Meanwhile, Howard Archer, chief European and UK economist at IHS Global Insight, said the ECB also seemed to have indicated that it was open to a “whole menu” of monetary policy instruments.

“Significantly, interest rate cuts now appear to be back on the table, having seemingly been off the agenda since September 2014,” he added.

Analysis: Andrew Walker, BBC economics correspondent

This is what Mario Draghi did NOT say: “we will open the QE taps wider”.

But there was a very clear hint that the ECB is preparing to expand the programme as soon as December. The factors keeping inflation so far below the 2% target require “thorough analysis” he said.

The degree of monetary policy accommodation – that’s QE – “will need to re-examined” at the December meeting.

International developments and financial markets “continue to signal downside risks to the outlook for growth and inflation”. None of this completely boxes the ECB in.

If the situation improves sufficiently in the meantime, they could still hold fire. But the odds have moved a bit further towards expanded QE in December. A sure sign that the eurozone’s economic recovery remains decidedly lacklustre.

Mr Draghi also said that the eurozone inflation rate was set to remain very low in the near-term.

“Since our last meeting, short-term inflation expectations have declined but more medium to long-term inflation expectations, after some decline following our last meeting, have now recovered and are basically unchanged since then,” he said.

After his comments, European bond yields and the euro fell.

German 10-year bond yields fell 5 basis points to 0.53%, and euro fell to a three-week low of $1.1226 against the US dollar, down 1% on the day.

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