Thursday, April 3, 2014

ECB ready to cut rate, other measures to boost inflation

    The European Central Bank (ECB), which earlier today left its benchmark refinancing rate at a record low of 0.25 percent,  is ready to use "unconventional instruments" and further rate cuts to tackle the risk of inflation remaining too low for a long period of time.
    "We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required," ECB President Mario Draghi told a press conference, sharpening the central bank's forward guidance about its intended monetary policy.
    "Hence, we do not exclude further monetary policy easing and we firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time," Draghi said, adding:
    "The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation."
    In his prepared statement, Draghi did not provide any details of the type of monetary tools - such as buying public or private sector bonds that is known as quantitative easing - that the ECB is considering using to further boost inflation, which has remained below 2 percent for 14 months.
     But during the press conference, Draghi said the council had discussed using quantitative easing as well as a lower deposit facility rate as part of a "very rich and ample discussion." Last month the ECB council had not discussed quantitative easing.
    In March inflation in the 18-nation euro zone fell to 0.5 percent from 0.7 percent in February. The ECB targets inflation of below, but close to 2 percent.
    While the low rate of inflation has re-awakened fears of the euro zone falling into a Japanese-style deflation, most economists and the ECB expect inflation to rise in coming months as long as the economy continues to improve.
    Draghi said the latest data confirm that the "moderate recovery of the euro area is proceeding in line with our previous assessment," and the latest forecasts from March show a prolonged period of inflation to be followed by a gradual upward move towards levels that are closer to 2 percent.
    Last month ECB staff cut its inflation forecast for 2014 to 1.0 percent but maintained the 2015 forecast at 1.3 percent. But inflation is likely to remain below the ECB's target for years as its forecast to average 1.5 percent in 2016, hitting 1.7 percent in the fourth quarter.
    Last week Jens Weidmann, president of Germany's Bundesbank and a member of the ECB's council, said the central bank should not overreact to a slowdown in inflation that is caused by cyclical factors and therefore temporary.
    Weidmann also said that about two-thirds of the decline in inflation could be attributed to falls in energy and food prices and monetary policy should only respond to such factors in the event that it leads to second round effects on other prices.
    While inflation is thus likely to remain below the ECB's target, the euro zone economy is starting to improve and Draghi said it is now increasingly supported by firmer domestic demand and this should continue, supported by low interest rates, progress in government budgets, better real incomes and lower energy prices.
    "Economic activity is also expected to benefit from a gradual strengthening of demand for euro area exports," Draghi said.
    The euro zone's Gross Domestic Product expanded by 0.2 percent in the fourth quarter from the third quarter, the third quarter of growth after six consecutive quarters of contraction.
    On an annual basis, fourth quarter GDP rose 0.50 percent, the first quarter in seven quarters of year-on-year negative growth rates.
    ECB staff last month revised upwards its forecast for 2014 GDP growth to 1.2 percent, up from 1.1 percent previously forecast, and 1.5 percent growth in 2015, up from 1.3 percent. For 2016 the ECB forecast growth of 1.8 percent.
    The ECB last cut its rate in November 2013 after a cut in May for a total cut of 50 basis points last year after a 25 point cut in 2012.
    In July 2013 the ECB introduced the forward guidance that it would maintain an accommodative policy stance for as long as necessary and rates would be held at present or lower levels for an extended period.



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