FRANKFURT, July 11 — There was “broad agreement” among European Central Bank governors at their June meeting that further stimulus might be needed to keep growth and inflation on track, a record showed today, a position made explicit soon afterwards by president Mario Draghi.
“There was broad agreement that, in the light of the heightened uncertainty... the governing council needed to be ready and prepared to ease the monetary policy stance further,” read the minutes of the meeting, published four weeks after it was held in Lithuanian capital Vilnius.
Policymakers have been faced with slowing growth, gloomy confidence and activity surveys and weaker inflation in recent months.
The indicators have been hit by uncertainty over global trade conflicts, a string of one-off effects, and the fizzling out of the upswing that followed the region’s financial crisis.
ECB staff trimmed their quarterly forecasts for growth and inflation in June, prompting the governors to extend their so-called “forward guidance” on how long rates would remain at historic lows to mid-2020.
Draghi went further at a conference in Sintra later that month, saying that “further cuts in policy interest rates... remain part of our tools”.
In the highly codified language that central bankers use and which financial markets watch closely for every tiny shift in tone, Draghi said the ECB was prepared to act “in the absence of improvement” rather than if economic conditions worsen.
For ECB watchers that signified a lowering of the threshold for action.
Some observers are concerned that the central bank has no more ammunition left in its battle against weak growth and inflation.
Beyond the extension of low interest rates and the possibility of cutting still further into negative territory, a third option would be to relaunch the €2.6 trillion (RM12.04 trillion) bond-buying scheme the ECB tied up in December.
Lowering the threshold
“Resuming net asset purchases” was definitely on the table at the June meeting, the minutes of the meeting showed.
But doing so could require central bankers to find ways around technical constraints on the programme.
In the past, there have been a number of legal and political objections to the bond-buying programme, known as quantitative easing or QE.
But policymakers have been able to deflect such criticism by limiting the proportion of the bonds of a particular country that the ECB can hold.
According to the minutes of the meeting, the governing council remained confident that “the fundamental economic forces remained in place for inflation to pick up over time” towards their goal of just below 2.0 per cent.
“Domestic demand had so far been rather resilient, underpinned by strong employment and wage growth” while “the risk of recession was low,” policymakers judged.
However, slowdowns in manufacturing-oriented economies such as Germany “might yet spread further” to the rest of the single currency area, some members cautioned.
ING analyst Carsten Brzeski said the combination of disappointing data, the faltering resilience of the eurozone economy, a possible rate cut by the US Federal Reserve and a series of comments by ECB officials had “all pushed the ECB closer to action at the July meeting.”
The only question was “whether words alone... will be enough at the July meeting,” the expert said.
Draghi is stepping down as ECB president and IMF chief Christine Lagarde has been nominated to succeed him. — AFP