ECB prepares antideflation gun

FRANKFURT (AFP) ― The European Central Bank on Thursday announced it was ready to act early next year should the euro area show signs of tipping into deflation and kept its key interest rates at record lows unchanged.

At its final policy meeting of the year, the ECB held its main “refinancing” rate steady at 0.05 percent, and its two other rates ― the marginal lending and the deposit rates ― at 0.3 percent and minus 0.2 percent respectively.

But the ECB’s decision to “substantially” downgrade its latest inflation and growth forecasts for the next three years suggested there is room for additional monetary easing.

ECB president Mario Draghi said the bank had stepped up preparations to undertake additional stimulus measures, such as central banks in Britain, Japan and the United States have done.

According to the ECB’s new forecasts, inflation in the single currency area should average 0.5 percent this year and pick up only gradually to 1.3 percent in 2016, a long way off the central bank’s target of around 2 percent.

At the same time, area-wide economic growth would amount to a paltry 0.8 percent in 2014 and expand to a lackluster 1.5 percent in 2016.

Low inflation or even falling prices may sound good for the consumer, but not from a central bank’s point of view. They can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Draghi insisted that the raft of different measures so far “will further ease the monetary policy stance more broadly” in the coming months.

The ECB would then “early next year reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments,” Draghi told a news conference in Frankfurt.

“Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council remains unanimous in its commitment to using additional unconventional instruments within its mandate.

“This would imply altering early next year the size, pace and composition of our measures.”

The ECB has already cut its interest rates to new all-time lows, made unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programs, and embarked on asset purchase programs (ABSs and covered bonds) to pump liquidity into the financial system.

But it has also hinted at more radical action in the form of quantitative easing, a policy used by other central banks to stimulate their sluggish economies.

QE is the large-scale purchase of government bonds and such a policy has many critics in Europe, not least the German central bank or Bundesbank, because it is felt that it takes the ECB outside its remit and is effectively a licence to print money to get governments out of debt.

Draghi argued that any decision to launch QE would not need to be unanimous on the ECB council.

“We don’t need unanimity. It’s an important monetary policy measure. It can be designed to have consensus,” Draghi said, adding that QE could take different forms, not simply sovereign bonds.