ECB ready to ease again as inflation goal is ‘some distance away’

The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt
The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

July 11, 2019

By Francesco Canepa

FRANKFURT (Reuters) – European Central Bank policymakers gathering last month agreed on the need to be ready to provide more stimulus to the euro zone economy in an environment of “heightened uncertainty”, an ECB account of the meeting showed on Thursday.

With a trade war between the United States and China hurting euro zone exporters and the Federal Reserve widely expected to cut its interest rate, the ECB is coming under pressure to ease its own policy again.

The bank’s Governing Council put off any rate hike for at least a year at its June 5-6 meeting and President Mario Draghi emphatically opened the door to more stimulus in the following weeks.

The account of the meeting suggests there was already “broad agreement” on the matter last month and a rate cut, a new change to the ECB’s policy guidance and even new asset purchases were all on the table.

“There was broad agreement that, in light of the heightened uncertainty, which was likely to extend further into the future, the Governing Council needed to be ready and prepared to ease the monetary policy stance further,” the ECB said in its account of the meeting.

The account also showed that the ECB was considering “more strategic” moves if inflation remained low and that it planned to emphasize that it would tolerate an overshoot as well as an undershoot of inflation compared to its target of just under 2 percent.

Policymakers deemed annual price growth of 1.6 percent currently forecast for 2021 to be “some distance away” from that goal and said there was “no room for complacency” in the face of plummeting inflation expectations on financial markets.

The most widely watched market gauge of long-term inflation expectations in the euro area – the so called five-year, five-year forward – was predicting price growth of just 1.2 percent.

Speaking in Frankfurt just before the account was published, ECB board member Benoit Coeure said the pessimism implied such instruments should be taken as a pinch of salt and estimates by professional forecasters and households were more benign.

“The pessimism priced into bond markets today may not necessarily presage downward pressure on inflation tomorrow – at least not to the same extent,” Coeure said.

The ECB’s Governing Council is due to meet again to discuss monetary policy on July 24-25.

(Additional reporting by Tom Sims; Editing by Toby Chopra)

Source link