ECB set to give eurozone 'one more adrenaline shot'

GMT 07:51 2016 Thursday ,10 March

Arab Today, arab today ECB set to give eurozone 'one more adrenaline shot'

President of the European Central Bank (ECB)
Frankfurt - AFP

With inflation now back in negative territory and the economic outlook clouding over, the European Central Bank is widely expected to give the eurozone another "adrenaline shot" of stimulus measures at its policy meeting Thursday, analysts said.

Moves announced by the ECB back in December were perceived by the financial markets as being half-hearted.

So, ECB chief Mario Draghi is set to announce bolder measures at his traditional post-meeting news conference this time, central bank watchers predicted.

These would likely include a further cut in interest rates, an increase in the volume of bonds it buys each month under its so-called quantitative easing or QE programme and possibly a further extension of that measure beyond its current timeframe of March 2017.

"Further policy action seems all but inevitable this month," said Ben May of Oxford Economics.

"We expect the ECB to announce a package of measures," the expert said.

May forecast a reduction in the bank's deposit rate from minus 0.30 to minus 0.50 percent and an increase in the monthly QE purchases from 60 billion euros ($66 billion) to 80 billion euros.

The ECB could also announce a replacement liquidity programme to run after its final TLTRO auction in June, May argued.

With area-wide falling inflation back in negative territory in February for the first time in five months -- it fell to minus 0.2 percent -- and eurozone growth not expected to pick up speed any time soon, the case for further stimulus measures is clear, analysts agreed.

- 'Done deal' -

At the last meeting in January, president Mario Draghi promised that the ECB's decision-making governing council would "review and possibly reconsider" the policy stance this month.

For UniCredit analyst Marco Valli that meant that "further monetary accommodation this week appears to be a done deal."

The deposit rate is the interest the ECB usually pays banks for the excess funds they place at the central bank overnight.

But it has been negative since June 2014, meaning the ECB effectively charges the banks for using the facility, in the hope that banks will instead lend the funds out to businesses and companies to get the economy moving.

However, banks complain the currently ultra-low interest rate environment is eroding profits and pushing the deposit further into negative territory could harm them further still.

The powerful German banking federation BdB is opposed to opening up the monetary sluice gates still further, insisting it will not provide any additional boost to economic growth.

"On the contrary, additional expansionary measures will do more harm than good," it said on Wednesday.

"We currently see no deflationary dangers whatsoever. The ECB is exaggerating the risks and acting too mechanistically," said BdB chief Michael Kemmer.

Some economists believe the ECB could introduce a tiered interest rate scheme to ease the burden on banks, whereby lenders would pay a lower or no penalty rate at all up to a specified amount of excess liquidity.

"If a tiered rate system were introduced, the burden on banks would rise less strongly and the deposit rate could be cut more sharply than if the ECB stuck to a universal penalty rate," said Commerzbank economist Michael Schubert.

A number of governing council members, notably Bundesbank chief Jens Weidmann, are opposed to additional stimulus measures.

The minutes from the December meeting, published in January, revealed that "some members" believed "that the existing policy measures were working in the right direction and more time should be given for them to unfold their full effect ... before adopting further monetary policy measures."

Nevertheless, the ECB's own staff economic projections, scheduled to be published on Thursday, are likely to provide the necessary ammunition to overcome such caution, analysts said.


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