The European Central Bank is on course for more aggressive monetary easing to boost flagging growth and weak inflation, amid fresh warnings about the outlook for the global economy.
Mario Draghi, the ECB president, has won wide support for further policy action next month, acording to minutes of the bank’s January policy meeting, released on Thursday.
The minutes show the governing council was unanimous in concluding that its current policy stance “needed to be reviewed and possibly reconsidered” in March, when the ECB’s quarterly macroeconomic projections will be available.
In another sign of concern, the OECD cut growth forecasts for the global economy from 3.3 per cent to 3.0 per cent. The Paris-based think-tank urged governments across the developed world to act “urgently” and “collectively” to bolster activity, and warned that global growth prospects had “practically flatlined”.
On Wednesday, minutes from the Federal Reserve’s January meeting also noted increased risks facing the US economy, amid a sharp fall in commodity prices and renewed worries over Chinese growth.
The People’s Bank of China, reluctant to cut interest rates further, said on Thursday it will inject more cash into the economy through money supply operations, and that this will be conducted daily instead of biweekly.
Markets are expecting the ECB’s deposit rate to be cut another 10 basis points to minus 0.4 per cent next month, while the €60bn quantitative easing programme launched a year ago is likely to be increased in scope.
However, there remains some resistance from hawks on the governing council, notably Jens Weidmann, Bundesbank president, to a radical extension of ECB’s asset-purchase scheme.
The calls for urgent action come at a time of increased doubt over whether unconventional monetary policy is effective and concern about fragility in the European banking system.
“European monetary policy will soon reach its limit,” said Vincent Juvyns, global market strategist at JPMorgan Asset Management. “What will really revive the European economy is structural reform, labour reform.”
The ECB first pushed interest rates into negative territory in June 2014. In December, the ECB stepped up its efforts, pledging to keep QE going until March 2017 or later, while cutting its deposit rate 10 basis points further into negative territory, at minus 0.3 per cent.
Earlier this week Mr Draghi heightened expectations that the central bank will take further action in March to bolster the eurozone economy, when he told the European parliament that the bank would “not hesitate to act”.
Francis Scotland, portfolio manager at Brandywine Global, said central bank policy “has been the only game in town” for generating growth in recent years. “But they appear to be running out of ammunition,” he said.
The minutes of last month’s ECB meeting showed that committee members considered it “premature” to conclude what action could be taken, given financial market volatility and a wide sense of uncertainty, but it reaffirmed that rates would remain “at current or lower levels for an extended period of time”.
Some ECB members want more aggressive action, with at least one saying it would “be preferable to act pre-emptively, taking emerging risks into account, rather than to wait after risks had fully materialised,” according to the account.
Between the ECB’s December and January meetings, the Euro Stoxx 50 equity index lost 17 per cent of its value, as a fall in oil prices and events in China “increased risk aversion globally,” the minutes recorded Benoît Cœuré, member of the ECB’s executive board, saying.
Peter Praet, another member, noted that financial market conditions in the euro area “had clearly deteriorated”.
ECB board members “widely agreed” that monetary policy was having its intended impact of easing financing conditions, supporting the real economy and bolstering the eurozone’s resilience to external shocks.
But new data last week offered grounds for scepticism, as the eurozone economy expanded just 0.3 per cent in the final quarter of 2015, while inflation in the region is stuck at 0.4 per cent. It has been below 1 per cent for more than two years and missed an official inflation target of “close to but below” 2 per cent for four years.
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