The European Central Bank has lowered its projection for inflation next year to 1.2 percent from 1.3 percent, a step that could support arguments for more monetary stimulus to raise price levels closer to the bank’s goal.
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A negative deposit rate means banks have to pay to park excess cash at the ECB overnight, an unusual state of play that has squeezed banks’ profits and sparked fears lenders could pass the charges on to customers.
In his prepared remarks prior to the Q&A session in his press conference, Draghi noted that the European Central Bank is standing pat for now as the fallout from Brexit has been less dramatic than expected, though risks remain.
NO ACTION: The European Central Bank chose to leave its key interest rates unchanged.
Drahgi said European Central Bank members did not discuss extending QE, nor did they broach the topic of buying equities or other means to bolster the existing stimulus program.
Draghi was questioned by reporters about the possibility of expanding quantitative easing but refrained from providing any hints. The euro also gained vs. the USA dollar, rising to 1.1322.
Its stimulus measures so far have included cutting the benchmark interest rate to zero, and the rate on deposits from commercial banks to minus 0.4 per cent.
Still, Draghi said the European Central Bank would provide more support to the market and economy if conditions worsen. “If warranted, we will act by using all the instruments available within our mandate”. Please see our terms of service for more information.
The choice is then between tweaking purchase rules or going for a bigger redesign although markets expect the bank to come up with a compromise.
It added that the asset purchase programme could continue beyond March 2017, if necessary, and in any case until the bank sees “a sustained adjustment in the path of inflation consistent with its inflation aim”.
The move in markets following the decision suggests that some investors thought the bank would extend its bond-buying program.
That meeting saw the launch of a new tranche of cheap loans for banks, the expansion of QE from €60-80 billion (US$90 billion) per month and its extension to corporate as well as government bonds, and an interest rate drop.
Mr Draghi also cut eurozone growth expectations for 2017 and 2018, from 1.7% to 1.6%, although the Bank raised forecasts for 2016 from 1.6% to 1.7%.
Still, each of these changes would generate concern or even outright opposition from the hawks and the growing camp of moderates on the Governing Council, who worry about the unintended negative effects of the ECB’s extraordinary stimulus. It also revised down forecasts for euro-area growth in each of 2017 and 2018 to 1.6 percent from 1.7 percent, while raising the prediction for the current year to 1.7 percent from 1.6 percent.
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He said that implementation of “structural reforms” – that is, steps to make economies more business and growth-friendly – “needs to be substantially stepped up to reduce structural unemployment and boost potential output growth”.
