In the eurozone’s battle to kick-start growth and boost inflation, the European Central Bank hinted Thursday it will keep its powder ready for a new volley of shots in December.
The central bank for the 19-nation eurozone agreed after a two-day meeting in Malta to hold its key interest rate steady at a record low 0.05 percent and take no immediate new measures.
But in a news conference after the decision, ECB chief Mario Draghi said the powerful bank is ready to use its ammunition if needed, sending financial markets higher as they anticipated more action to stimulate economic activity.
“The degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting,” Draghi said.
By then, the ECB will have drawn up its updated growth and inflation forecasts for the euro area, Draghi added.
And if the council does decide that additional monetary policy measures are necessary, it is “willing and able to act by using all the instruments available within its mandate if warranted in order to maintain an appropriate degree of monetary accommodation,” he said.
Draghi “opened the door very wide to further stimulus as soon as December,” said IHS Insight analyst Howard Archer.
– Rate cuts back on table –
Significantly, those stimulus measures could also include a possible further reduction in the bank’s key interest rates, already at all-time lows, the ECB president suggested.
In the past, Draghi has said that eurozone borrowing costs are at their “lower bound”, but his latest remarks suggest that rate cuts are now back on the table.
The lending rate on the bank’s so-called deposit facility — which is already in negative territory and stands at minus 0.2 percent — could be lowered further.
Nevertheless, “no decision was taken just yet. It was an open discussion,” Draghi said.
With consumer prices in the euro area slipping by 0.1 percent in September, and given the information currently available, area-wide inflation “will remain very low in the near term,” Draghi said.
In addition to rate cuts, the ECB has launched a number of other schemes to try speed up inflation and bring it back to levels of just under 2.0 percent, which the ECB calculates is the level conducive to healthy economic growth.
Most recently, it launched a programme known as quantitative easing or QE, under which it plans to purchase more than 1.0 trillion euros in bonds at a rate of 60 billion euros per month, at least until September 2016.
– Beefed-up QE –
But analysts believe the programme could now be beefed up and extended beyond that timeframe.
The QE programme was “proceeding smoothly and (continuing) to have a favourable impact,” Draghi said.
Nevertheless, the ECB was not in “wait-and-see mode, but work-and-assess,” he added.
ECB watchers were surprised by the unambiguousness of Draghi’s remarks.
“This was an uncharacteristically clear statement of intent,” said David Lamb, head of dealing at foreign exchange specialists FEXCO.
“The ECB is still deeply concerned about the threats to the eurozone’s patchy recovery, and is planning to announce more QE before the end of the year.” he said.
Draghi’s remarks sent markets higher.
In the eurozone’s main markets by late afternoon, both Frankfurt’s DAX 30 Paris’s CAC 40 were more than two percent higher.
Analysts think the ECB could soon accelerate or increase QE in the face of growing fears of a dangerous downward spiral of deflation.
While falling prices might appear to be good for consumers, they can be poisonous to the economy. The fear is that deflation could become entrenched if consumers delay purchases in the hope of lower prices later, which in turn prompts companies to hold off investment, creating a vicious circle of falling demand and fewer jobs.
– Raising its bets –
“The ECB today clearly increased its bets,” said Carsten Brzeski at ING DiBa agreed.
The governing council “sounded more concerned about the growth outlook,” so much so that some members had even been willing to act this month, Brzeski said.
“All in all, Draghi has been more explicit than we had expected. The door for more monetary stimulus is wide open and does not necessarily have to be more QE,” the expert said.
Natixis economist Johannes Gareis said the ECB had demonstrated in the past that it would not simply “talk the talk without walking the walk.”
“Clearly, an increase and extension of QE together with a deposit rate cut would have the most powerful effects and we would not rule out that the ECB serves this cocktail of measures at its December meeting,” he said.