ECB could ramp up stimulus as growth, inflation outlook weakens

The European Central Bank said Thursday it could scale up its contentious stimulus programme of bond purchases as the outlook for growth and inflation in the eurozone clouds over.

Saying it was still too early to determine the extent and impact of the economic fallout from China's slowdown and lower oil prices, the ECB held its benchmark "refi" refinancing rate at the current all-time low of 0.05 percent, as expected.

But president Mario Draghi, celebrating his 68th birthday, told a news conference after the meeting that monetary policy makers were ready to act if needed.

Referring to a policy known as quantitative easing or QE, Draghi said that "the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme".

It was "intended to run until the end of September 2016, or beyond, if necessary," he added.
Fears of deflation -- a dangerous spiral of falling prices -- had persuaded the ECB to launch in March the QE programme, under which it plans to purchase 60 billion euros ($68 billion) of sovereign bonds each month until September 2016, or 1.14 trillion euros in all.

Initially the scheme appeared to work, slowly pushing inflation back up in core eurozone economies such as France and Germany.
But euro-area inflation still stood at only 0.2 percent in August. And the ECB has now downgraded its inflation forecasts for 2015, 2016 and 2017 in the face of falling oil prices to way below the level of 2.0 percent which the central bank regards as conducive to healthy economic growth.

At the same time, the ECB said that recovery in the euro area would continue, but at a slower pace than previously anticipated.

Analysts were convinced the ECB would extend and increase the monetary stimulus if warranted.

"The words chosen by the ECB suggest that it would not hesitate to raise the size of its asset purchases and prolong them beyond September 2016 if the outlook for growth and inflation weakens further," said Berenberg Bank economist Holger Schmieding.

"The ECB was rather clear. It would not take much further turbulence to trigger an ECB response. We can count this as a clear verbal intervention,"  he added.

"In brief, the ECB has shown markets the safety net. If required, the ECB could scale up its monetary stimulus."

Tom Rogers, senior economic adviser to the EY Eurozone Forecast, agreed.

"On the face of it ECB policy seems unchanged by the recent market turmoil, and slowing growth in China. But the downward revisions to the ECB's forecast for inflation in 2016 imply that QE will go on longer than the current end-point of September 2016," he said.

"Opening the door to further stimulus -– even if it proves unnecessary -- should keep the euro weak in the coming few months, which will aid the ongoing recovery in trade with recovering advanced economies as well as wider business confidence and investment," the analyst said.
On Wednesday, the International Monetary Fund had said that the QE programme had "improved confidence and financial conditions," but called for it to  be "extended if there is not sufficient improvement in inflation."

Natixis economist Johannes Gareis said that Draghi "made clear that the ECB has the finger on the trigger should the situation get just a little worse".

Carsten Brzeski at ING DiBa similarly felt Draghi was "keeping the door open for stepping up QE".

"On his birthday, Mario Draghi did not receive, but actually gave a present to financial markets, stressing the ECB's determination to do everything to support the eurozone economy," Brzeski concluded.