ECB Saw Need to Counter Doubt Over Ability to Hit Inflation Goal
When ECB President Mario Draghi set a plan in motion late last month to study a new round of stimulus, a key driving force was reassuring markets and the public that policy makers had the tools to tackle weak price pressure in a slowing economy. It’s been a hard sell for the bank, which has seen bund yields continue to slip further and further below zero.
“Communication needed to strike a careful balance between, on the one hand, giving unduly negative signals about the economy and, on the other hand, effectively counteracting the concern among some observers that the Governing Council lacked the necessary instruments to secure the convergence of inflation to its inflation aim over the medium term.”
ECB account of July 24-25 session
The ECB already plans for new loans to banks to keep money flowing in the economy, and Draghi has ordered staff to look at all options, ranging from interest-rate cuts to a new round of quantitative easing. The problem is the ECB’s deposit rate is already at a record low and it’s not clear how the central bank can get around self-imposed limits on bond purchases.
At the meeting, Governing Council members broadly agreed that a downward trend in inflation expectations was a cause for concern, and that the euro area’s economic slowdown was likely to be more protracted than expected. Prospects for global trade “remained poor,” indicating officials saw continued pressure on manufacturing.
Investors are betting on at least an interest-rate cut on Sept. 12, Draghi’s penultimate policy session, and some economists predict that large-scale asset purchases will be restarted.
Officials exchanged ideas in July on a list of policy options and how their response should be designed. That included an introduction of mitigating measures, such as a tiering system to exempt banks from some of the pain of negative rates. Some expressed concern that tiering could have “unintended consequences.”
At least one member pushed for a package of measures, saying experience had shown that to be more effective than a sequence of actions. Finnish central banker Olli Rehn subsequently called for a significant package that would overshoot market expectations.
The policy discussion underscores the growing sense of urgency among ECB officials that they need to act to help lift the 19-nation bloc out of its doldrums. Germany, the largest economy, is on the edge of recession after a second-quarter contraction, with a report earlier on Thursday showing demand falling at the fastest pace in six years and factory activity shrinking.
Further risks lie ahead, including the prospect of a disorderly Brexit on Oct. 31 and the possibility that U.S. President Donald Trump will take his trade war directly to Europe.
Fresh ECB easing would come amid a worldwide push to stimulate growth as the global expansion falters under trade tensions. U.S. Federal Reserve Chairman Jerome Powell is expected to use his speech at the central bank symposium in Jackson Hole, Wyoming, on Friday to signal readiness to cut rates again.
The minutes from the Fed’s July meeting published on Wednesday showed officials viewed their cut last month as insurance against too-weak inflation and the risk of a deeper slump in business investment.
At their gathering, ECB officials again called for governments that have room to spend to use it. Germany is considering boosting budget spending if the slump worsens. Finance Minister Olaf Scholz has said he could raise 50 billion euros ($55 billion) if needed -- the same amount as Germany’s package during the global financial crisis.