ECB monitors impact of anti-deflationary measures

GMT 16:46 2014 Sunday ,29 June

Arab Today, arab today ECB monitors impact of anti-deflationary measures

European Central Bank
Frankfurt - AFP

 The European Central Bank is unlikely to make new policy moves at its monthly meeting next week, focusing instead on monitoring the impact of last month's unprecedented package of measures.
After cutting rates last time round and pre-announcing new liquidity measures in its battle to prevent the single currency area from slipping into deflation, the ECB will "sit tight" at its meeting on Thursday, central bank watchers predicted.
"The ECB is clearly going to sit tight for now at least while the interest rates and liquidity measures it announced at its June meeting increasingly kick in," said Howard Archer at IHS Economics and Country Risk.
"Indeed, a number of senior ECB policymakers have indicated that the bank is unlikely to act again in the near term at least, as it will take time for its recent announced package of measures to take full effect," the expert continued.
ECB executive board member Yves Mersch told German public radio in an interview released Sunday that "we see no heightened or acute danger of deflation at the moment", although inflation would likely stay low for some time.
He said that since the latest ECB rate cuts in June, short-term interest rates had moved down and that "in this respect our measures have had the desired effect".
Asked whether rates would likely stay low until 2016, he said: "If all other factors stay as they are today, then... this could be the case," cautioning however that "reality is often far more complex".
At its June meeting, the ECB entered uncharted waters, taking one of its key interest rates into negative territory for the first time.
It lowered its benchmark refinancing rate to 0.15 percent and cut the deposit rate, the rate at which the central bank pays commercial banks for depositing their unused cash, to minus 0.10 percent.
This means that banks will be charged for parking funds at the ECB, in the hope they might lend it on to businesses and consumers instead.
ECB chief Mario Draghi also unveiled plans to pump more liquidity into the financial system later this year via the Targeted Long-Term Refinancing Operation (TLRTO).
These are different to the liquidity measures it took at the end of 2011 and the beginning of 2012.
At that time, banks did not lend the cash on to the small and medium-sized companies that form the backbone of the eurozone economy and so this time, the ECB is targeting the loans to encourage banks to lend to households and non-financial corporations.
- Other measures up sleeve -
With regard to further follow-up action, Draghi promised in early June that the ECB would "if required ... act swiftly with further monetary policy easing".
But he admitted that in terms of interest rate cuts alone, there was no further room for action.
"For all the practical purposes we have reached the lower bound," he said.
Analysts therefore believe the ECB has other possible measures up its sleeve, even so-called quantitative easing (QE) -- widescale purchase of sovereign debt practised by other central banks, but which the European bank has steered clear from imitating so far.
"The ECB has indicated that it is prepared to take further action if the risk of prolonged too low inflation morphing into deflation persists," Archer at IHS Global Insight said.
"And the ECB will likely want the market to keep thinking that further policy action is a very real possibility so as to keep downward pressure on the euro and market interest rates."
Capital Economics economist Jennifer McKeown also believed that the ECB "is very unlikely to unveil additional policy support at its policy meeting on July 3 as it waits to judge the effect of the raft of measures announced in June".
She expected Draghi to reiterate that interest rates should be on hold for a long time yet.
"He will probably also explain that a broader programme of quantitative easing involving government bond purchases is within the ECB's mandate. But he will claim that inflation expectations are well anchored and that such steps are not necessary for now," she said.
Commerzbank economist Michael Schubert said the ECB "will probably want to wait and see what impact the steps taken so far will have.
"At the same time, ECB president Draghi is set to leave the door wide open for QE at the press conference," he suggested.

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