Thursday, November 7, 2013

ECB to give banks all funds needed, sees low inflation

    The European Central Bank (ECB), which earlier today cut is policy rate for the second time this year following a sharp drop in inflation, will give banks all the money they need for as long as necessary, and at least until the second quarter of 2015, to boost economic growth.
    The ECB, which has now cut its benchmark refinancing rate by 50 basis points this year to 0.25 percent, said its main refinancing operations would be conducted with fixed rates and full allotment at least until July 2015 while its special-term refinancing operations would be continued for as long as needed, or at least until the second quarter of 2015.
    The ECB will also carry out another round of three-month longer-term refinancing operations (LTROs) for as long as needed, or at least until the second quarter of 2015. The ECB pumped in 1 trillion euros to banks through LTROs in 2010 and 2011, helping overcome the sovereign debt crises.
    Economists had expected the ECB to hold fire at its meeting today and wait with any new measures to stimulate economic activity until next month's release of its latest forecast or early next year. But the surprisingly-large fall in inflation in October to 0.7 percent from September's 1.1 percent convinced the ECB to take action.

    "The decisions are in line with our forward guidance of July 2013, given the latest indications of further diminishing underlying price pressures in the euro area over the medium term," ECB President Mario Draghi told a news conference.
    "The economic analysis indicates that we may experience a prolonged period of low inflation, to be followed by a gradual upward movement towards inflation rates below, but close to, 2% percent later on," Draghi said.
    The ECB targets inflation of close, but below 2.0 percent but in October and earlier this week the European Commission forecast annual inflation of only 1.5 percent next year, slowing further to 1.4 percent in 2015.
    The drop in September's inflation rate was larger than Draghi had expected, reflecting lower food prices and a larger fall in energy prices. Based on futures prices, inflation is expected to remain at low levels in coming months.
     In July the ECB broke with tradition and joined other major central banks in giving financial markets and investors details on how it expects its policy stance to evolve as way to reinforce expectations. At that time the ECB said its policy stance would remain accommodative for as long as necessary and it expects the key policy rates to remain at present of lower levels for an extended period of time.
    Draghi affirmed this guidance, saying ECB's monetary policy stance would "remain accommodative for as long as necessary" and its governing council had confirmed that it "expects the key ECB interest rates to remain at present or lower levels for an extended period of time."
    "This expectation continues to be based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics," Draghi added.
    The ECB still expects economic output to recover at a slow pace and survey-based indicators are consistent with continued, albeit modest growth in the second half of the year.
    But hopes for swifter economic improvement were dealt a blow earlier this week when the European Commission cut its 2014 growth forecast to 1.1 percent from a previous 1.2 percent. This is in line with the ECB's forecast from September for 1.0 percent growth.
    This year the euro zone is expected to shrink by 0.4 percent following a contraction of 0.6 percent in 2012.
    "The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi said, adding that financial market developments may negatively affect economic conditions along with the risk of higher commodity prices, weaker-than-expected domestic demand and export growth, along with slow or insufficient structural reforms.


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