ECB revs up markets

The European Central Bank sought Thursday to assuage market disappointment over its recent anti-deflation policies by promising to revisit the level of euro area interest rates and other stimulus measures in March.
At its first policy meeting of 2016, the ECB held its key interest rates unchanged, as had been widely expected.

But Draghi said the central bank could review its monetary policy stance at its next meeting in March, immediately sparking a rally in stock markets and bringing down the euro.

"The decisions taken in early December ... were fully appropriate," Draghi insisted, rejecting suggestions that they had been too timid.

"Yet, as we start the new year, downside risks have increased again amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets, and geopolitical risks," Draghi said.

"In this environment ... it will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March, when the new staff macroeconomic projections become available."

- 'Determined to act' -

The ECB was "determined" to do everything in its power to steer eurozone inflation back up towards levels conducive to healthy economic growth, and there were "no limits" as to how far it is prepared to go in that respect, Draghi said.

"We have the power, willingness and determination to act."

A long series of policy moves by the ECB over the past 18 months -- ranging from interest rate cuts, the provision of unprecedented amounts of cheap liquidity and a controversial programme of bond purchases -- has failed to steer stubbornly low inflation back up to the target level of close to but just under 2.0 percent.

Area-wide inflation stood at a meagre 0.2 percent in December.
But "we are not surrendering," Draghi insisted.

At its last meeting in December, the ECB cut its key "deposit" rate by 0.10 percentage point to minus 0.30 percent and extended the length of its asset purchase programme known as quantitative easing or QE by six months to March 2017.

At the time, those decisions disappointed financial market players, as they had expected much more decisive action.

Some ECB watchers argued that the tentativeness of the moves was an indication of divisions within the central bank's 25-member governing council regarding the need for more action, an interpretation apparently backed up by the minutes of the meeting, released earlier this month.

According to the minutes, "some" members had argued "that the existing policy measures ... should be given time for them to unfold their full effect ... before adopting further monetary policy measures."
- 'No divisions' -

But Draghi denied there was disagreement within the ECB on the matter.

"There are no such divisions," Draghi said.

Analysts were cheered by the ECB chief's New Year message.

"What was expected to be a dull first meeting of the year turned out to be an exciting (one)," said ING DiBa economist Carsten Brzeski.

"Draghi sounded much more concerned about the outlook for the eurozone economy," the expert said.

"He explicitly mentioned the renewed sharp drop in oil prices, the appreciation of the euro and the slowdown of emerging markets and China."

He also mentioned the volatility in financial and commodity markets as one of the factors behind the increase in downside risks, Brzeski noted.

"The question, however, is whether and what the ECB can really deliver in March."

RBS economist Andrew Cates said he had previously been pencilling in further easing in June.

"But in light of today's dovish rhetoric, we have pulled forward the timing of that forecast for further easing to March."

Cates predicted that the ECB could pare back its deposit rate still further by 0.10-0.15 percentage point and boost the size of its QE purchase programme.

Commerzbank economist Michael Schubert said Draghi's comments were "in line with our prediction of further measures, although we still think another rate cut more likely than an increase in the monthly volume of asset purchases."
Source: AFP