ECB Opted for More Time to Analyze Economic Risks, Accounts Show

The European Central Bank said policy makers opted to take more time to analyze downside risks for growth and inflation in the 19-nation region.

While there was “broad agreement that downside risks to the outlook for inflation had increased,” the Governing Council “felt that more time was needed to gain a better understanding of the underlying driving forces,” the ECB said in a summary of its Sept. 2-3 monetary-policy meeting. “The president concluded that it remained premature to judge whether recent developments would have a lasting impact on the medium-term outlook.”

The ECB is grappling with the fallout of weaker growth in emerging markets such as China and a renewed slump in oil prices that is weighing on inflation. President Mario Draghi stoked expectations for an expansion of quantitative easing at his press conference after last month’s meeting, when he tweaked his language on the duration of the program, cut the ECB’s economic forecasts and pointed to further downside risks ahead.

Even though he’s also said it’s too soon to decide, and half the euro-area’s national central bank governors have argued against considering a boost for now, most economists surveyed by Bloomberg say more stimulus is on the way.

“It appeared that the liquidity injected through the Eurosystem’s policy measures had not been distributed evenly across the euro area and was feeding only very slowly into higher demand and activity,” the accounts show.

The ECB currently intends to buy 60 billion euros ($67 billion) a month of assets including sovereign debt, agency bonds, covered bonds and asset-backed securities through September 2016 to return inflation to its goal of just under 2 percent. The rate was minus 0.1 percent in September, the first negative reading since QE started in March, and officials predict it averaging just 1.7 percent in 2017.

While last month’s price drop was driven by energy, which slumped 8.9 percent, the risk is that the broad decline becomes entrenched. In a sign that manufacturers have started to pass on lower oil costs, factory-gate prices fell in September for the first time in six months, according to a Markit Economics report on Oct. 1. 

The ECB said “it would be unwise to draw premature conclusions from any short-term developments which might vary from one day to the next.”

An increase in prices for non-energy goods “could be a sign that firms were regaining pricing power,” and “this implied that the deflationary risks were receding for a greater part of the euro area,” it said.

That bodes well for the strengthening economic recovery. Economic confidence unexpectedly increased in September to the highest in more than four years as sentiment in the industrial and services sectors improved, despite weakening growth in emerging markets. Consumer spending is benefiting from slowly receding unemployment.

Peter Praet, the ECB’s chief economist, told policy makers that private consumption “should remain the key driver of the euro-area economic recovery, while the modest recovery of business investment in the first half of 2015 was expected to continue,” according to the account.

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