Daily Management Review

ECB Points to December Meeting and Leaves Door Open to More Stimulus


ECB Points to December Meeting and Leaves Door Open to More Stimulus
The European Central Bank firmly shot down any talk of tapering its 1.7 trillion euro asset-buying program but kept the door open to more stimulus in December even as it left ultra-loose monetary policy unchanged.
ECB President Mario Draghi emphasized that a long-awaited rise in inflation is predicated on "very substantial" monetary accommodation and left a wide range of options on the table while offering few clues to the euro zone central bank's next move.
The ECB has provided unprecedented stimulus for years even while struggling to stave off deflation. With the aim of boosting inflation back to the ECB's target of just under 2 percent, the central bank has offered banks free loans, buys 80 billion euros worth of bonds each month and has cut rates into negative territory.
Raising doubts whether it will be sustainable Draghi warned on Thursday that an expected rise in inflation in the coming month would be driven mostly by the fading effect of past oil price falls in a possible argument for even more easing.
"There are no signs yet of a convincing upward trend in underlying inflation," Draghi told a news conference.
But it is not until December that the ECB would have to decide whether to extend its bond buys and any decision about the bank’s policy stance would be left until such time, said Draghi. The bonds are due to end in March.
"Sometimes it's also important to say what we did not discuss. And we didn't discuss tapering or the intended horizon of our asset purchase program," Draghi said.
Draghi also said that the program would not end abruptly when the time comes and would be gradually wound down in what may be seen as a de facto commitment to some form of extension of asset purchases, known as quantitative easing, or QE.
"My perception is that a sudden stop as outlined before is not ... present in anybody's mind, it's not something that people naturally contemplate," he said, calling a sudden end "unlikely".
The euro eased back to a four-month low of $1.0921 as markets are increasingly pricing in more easing after it initially rose 0.5 percent to $1.1040 on Draghi's comments that an extension was not discussed.
The ECB maintained its guidance for rates to stay at their current or lower levels for an extended period and kept the deposit rate at minus 0.4 percent.
"In our view, the ECB is not yet ready to extend QE. The recovery of the euro zone economy is not weak enough to justify more stimulus but also not strong enough to light-heartedly talk about tapering. This is why the ECB is simply buying time," ING economist Carsten Brzeski said.

"Mario Draghi's elegant balancing between tapering and an extension of QE keeps all expectations alive and could have one welcome fall-out: slightly higher long-term rates which will bring some relief to the scarcity problem without panic," Brzeski said.
"If, as we expect, the ECB extends QE by nine months, we estimate that under the current regulations it would by early summer 2017 no longer be able to find sufficient Bunds suitable for purchase. Consequently in December the Bank will have no choice but to change the rules of the program," Commerzbank analysts said in a note.