ECB Not In A Hurry To Ease Policy Today, But Leaves The Door Open

Jan. 21, 2016 (Econoday) – There were no surprises in today’s ECB announcement. The central bank’s first policy meeting of the year duly concluded with no change in any of its key interest rates meaning that the benchmark refi rate stays at 0.05 percent, the deposit rate at minus 0.30 percent and the marginal lending rate at 0.30 percent.

Having only just eased in December, albeit by less than financial markets were hoping, additional action so soon would have done nothing to enhance the monetary authority’s credibility. In any event, the ECB can justifiably say that it needs time to assess the full impact of last month’s measures.

Having been accused of misleading investors in December by encouraging overly aggressive easing expectations, Draghi was no doubt keen to be as transparent as possible in his post-meeting comments. To this end, he sounded dovish and emphasised increased downside risks to the Eurozone stemming from rising uncertainty about the outlook for emerging market economies, heightened volatility in the financial and commodity markets and increased geopolitical instability. Against this backdrop the outlook for inflation is now seen to be significantly lower than anticipated in early December.

The ECB’s next meeting is on 10th March and while a new move on QE (or rates) then also seems rather early at this stage, should the economy slow and inflation continue to move the wrong way, the central bank might feel obliged to act. Indeed, updated staff economic forecasts will be available that month and Draghi emphasised today the importance of their role in shaping the policy outcome. Financial markets will definitely be scrutinising the economic data all the more closely now and any signs of renewed weakness will boost speculation about yet another round of easing initiatives. Recall that some members already wanted a 20 basis point cut in the deposit rate last month rather than the 10 basis point reduction that was actually delivered.

The bottom line is that the ECB has at least alerted investors to the possibility of a looser monetary stance in March. The danger is that, as in December, expectations get out of hand again but, in the interim the ECB chief’s comments today should put some fresh downside pressure on the euro. And, if realised, this would certainly not displease a central bank that was clearly unhappy with the way in which the euro responded to the December policy announcement.

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