ECB Policy Makers Signal Stimulus Is Ahead on Feeble Inflation
(Bloomberg) -- European Central Bank policy makers gave added impetus to expectations that more monetary stimulus is on the way, expressing concerns about the euro zone’s feeble inflation outlook.
Philip Lane, who joined the Executive Board as chief economist in June, used his first speech in the role to claim past measures have been effective and more can be done if needed. Dutch Governor Klaas Knot, typically considered on the hawkish wing of the Governing Council, said it is “‘indisputable” that inflation is too low. Spanish Governor Pablo Hernandez De Cos said the ECB’s prediction that inflation will be 1.6% in 2021 is “far” from its goal.
German bonds rose, sending yields lower, as investors bet the comments signal further easing is as good as locked in. Investors and economists predict that the ECB will cut interest rates as soon as this summer. The deposit rate is already at a record low minus 0.4% and the central bank only capped its 2.6 trillion-euro ($3 trillion) quantitative-easing program at the end of last year.
The remarks at a Bank of Finland conference in Helsinki echoed President Mario Draghi’s recent promise that there is room to cut interest rates from record lows or resume bond purchases to boost inflation amid the current economic slowdown. The euro zone is struggling under a manufacturing downturn driven largely by global trade tensions, and a gauge of factory activity published Monday showed factories still stuck in a slump.
Lane said the ECB’s long-term bank loans and a communication strategy provide complementary support, and that it is vital the central bank be quick on its feet.
“It is essential that a central bank shows consistency in its monetary policy decisions by proactively responding to shocks that might delay convergence to the target or move inflation dynamics in an adverse direction,” he said. “The effectiveness of the policy toolkit means that we can add further monetary accommodation if it is required to deliver our objective.”
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“We forecast the ECB will change the wording of its forward guidance at the July meeting to signal an easing bias. We expect the deposit rate to be lowered by 10 basis points in September.”
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Knot agreed that the ECB has space to resume bond-buying if needed, and said it’s “important to underline the Governing Council stands ready to act decisively" if adverse scenarios materialize.” Draghi set an even lower bar for action last month, saying the ECB would step in if the outlook doesn’t improve.
Lane said the ECB’s latest adjustment to its communication on interest rates -- a pledge to keep them on hold through at least the first half of 2020 -- isn’t “intended to ratify market views.” Rather, it offers an idea of the most likely path foreseen by the Governing Council given the current state of the economy.
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