ECB opens the door to December stimulus

The European Central Bank is positioned to expand its €1.1 trillion asset-purchase programme and cut its deposit rate in December after Mario Draghi announced the bank was "ready to act when needed" should the slowdown in emerging markets threaten the currency area's economic recovery.

The euro weakened from $1.131 to $1.123 against the dollar after ECB president Mario Draghi said policymakers’ measures would need to be “re-examined” in December.

Mr Draghi said the central bank stood ready to adjust the “size, composition and duration” of its quantitative easing package. At the moment, the ECB is buying €60 billion of mostly government bonds a month, which it intends to do at least until September 2016.

Benchmark

Two-year borrowing costs for the German government, seen as a benchmark for the rest of the euro zone, sunk to a record low of minus 0.293 per cent on the news.

While the programme appears to have thawed the region's credit markets, growth remains lacklustre and inflation has fallen back into negative territory. The ECB president said the outlook for inflation was now "less sanguine" and warned of the risks emanating from emerging markets, notably China.

Some members of the 25-strong council had called for action as soon as yesterday, although Mr Draghi warned this was “not a prevailing theme” of the policy deliberations.

Interest rates

The ECB could also renege on an earlier promise to leave interest rates unchanged and cut its deposit rate further into negative territory, a move likely to weaken the euro if realised.

The ECB president said cuts into negative territory by other central banks, such as the Swiss National Bank and Scandinavian authorities, had led the ECB to reassess where the lower boundary for interest rates lay.

“We’ve seen the experience of other central banks and now we’re thinking about that,” Mr Draghi said.

The central bank’s governing council yesterday held the deposit rate, which it charges on banks’ deposits parked at the ECB, at minus 0.2 per cent.

The benchmark main refinancing rate, charged on banks’ borrowings from the ECB, stayed at 0.05 per cent. Both rates are record lows.

Dirk Schumacher, an economist at Goldman Sachs, said Mr Draghi's remarks were a "clear hint for further action in December".

By December, the ECB staff will have rolled out their latest quarterly projections for growth and inflation.

Most economists expect those projections to show inflation will take longer than previously thought to return to the ECB’s target of below, but close to, 2 per cent. That would force the central bank to act.

Baby steps

“Expect a package of measures in December with rate cuts and more bond purchases to significantly ease monetary conditions immediately, rather than to loosen policy in baby steps,” said

Richard Barwell

, an economist at BNP Paribas Investment Partners.

While inflation is set to remain low in the months ahead, Mr Draghi said policymakers still believed price pressures would pick up around the turn of the year. There were, however, “downside risks” to that outlook. – © The Financial Times Limited 2015