ECB Keeps Rate at Record Low as Officials Weigh ForecastsStefan Riecher and Jeff Black
The European Central Bank kept its benchmark rate unchanged at a record low after policy makers assessed new economic forecasts.
The Governing Council meeting in Frankfurt today left the main refinancing rate at 0.25 percent after cutting it by a quarter point last month. The decision was predicted by all 60 economists in a Bloomberg survey. Officials held the deposit rate at zero and the marginal lending rate at 0.75 percent.
ECB President Mario Draghi will release inflation and growth projections when holding a press conference at 2:30 p.m. They should add fuel to the debate over whether the central bank has done enough to prevent deflation and support the region’s economic recovery or whether it needs to turn to more unorthodox measures.
“If things get worse, the Council is ready, willing and able to act,” said Richard Barwell, senior economist at Royal Bank of Scotland Group Plc in London. While “various unconventional tools are on the table and the Council is prepared to use them,” Draghi will send a message “that there is no need to panic,” he said.
One option policy makers have discussed is a negative deposit rate. Other possible tools include asset purchases and long-term loans to improve credit flows to companies and households. The ECB may also decide to publish an account of their monthly meetings to hone communication.
The Bank of England kept its benchmark rate at 0.5 percent in London today and left its asset-purchase target at 375 billion pounds ($613 billion).
Since the ECB cut its key rate last month, data has shown that the euro area’s economic rebound came close to a halt with growth of just 0.1 percent in the third quarter. The French economy unexpectedly shrank and Italy extended its longest postwar recession.
“The recovery is weak,” said Anders Svendsen, an economist at Nordea Bank Denmark A/S in Copenhagen. “Risks are clearly skewed toward another rate cut and the door is likely to be left wide open to all non-conventional measures.”
Euro-area inflation was 0.9 percent in November, compared with the ECB’s target of just under 2 percent, and prices are stagnating or declining on an annual basis in five of the 17 euro nations. That means economists and investors are awaiting economic projections for 2015 to gauge the ECB’s need to act.
The institution currently predicts inflation will average 1.5 percent this year and 1.3 percent in 2014, with the economy contracting 0.4 percent and growing 1 percent, respectively.
The new forecasts should give “both an indication of the ECB’s current level of tolerance to low inflation and also help guide market expectations as to how long the ECB’s accommodative policy is likely to be in place,” said Nick Matthews, senior economist at Nomura International Plc in London.
Matthews predicts the ECB’s staff will forecast inflation and economic growth of 1.3 percent in 2015. Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich, said the forecasts will be for 2015 inflation of slightly below 1.6 percent and growth of about 1.5 percent.
ECB Governing Council member Ardo Hansson said in an interview on Nov. 22 that policy makers haven’t “fully exhausted” their room to cut interest rates yet and have a variety of “other measures” at their disposal if needed.
One unprecedented option that officials have discussed is charging banks for the excess liquidity they park at the ECB, which would make it the first major central bank to venture into negative deposit rates.
While Draghi said last month that the institution is “technically ready” for a rate below zero, he also cautioned that the consequences aren’t clear. One risk is that banks are unable to pass the cost onto their depositors, squeezing their profit margins and deterring them from lending to companies, households or each other.
Bloomberg News reported on Nov. 20. that officials are weighing a smaller-than-usual cut in the deposit rate to minus 0.1 percent to minimize any disturbance. ECB Vice President Vitor Constancio said in an interview on Nov. 27 that the policy would be invoked only in “quite extreme situations” and the council is “not really near a decision.”
Constancio also said that banks’ access to funding has improved and “is not the main cause of concern,” suggesting that measures to increase liquidity such as new long-term loans aren’t imminent. Banks have returned almost 40 percent of the 1 trillion euros ($1.4 trillion) in emergency cash they borrowed for three years at the height of the financial crisis in 2011 and 2012.
While Draghi may not offer any commitment to future policy action today, he may announce more transparency to come in the release of details of the Governing Council’s deliberations. He said in August that the ECB’s Executive Board will make a proposal to the council “during this fall.”
Governors including Estonia’s Hansson and Austria’s Ewald Nowotny have expressed their concern that publishing minutes with individual votes might expose policy makers to political pressure from their national governments.
“The ECB’s job is far from done and more action is likely in the coming months,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “But none of the possible steps are without risk. The ECB will need to find the right balance between being bold and reckless.”