ECB policymakers pushed for more stimulus ahead of December vote
Financial markets were not alone in having their hopes dashed by the European Central Bank’s response to the latest setback for the eurozone economic recovery last month. Some of the region’s monetary policymakers had backed more forceful monetary stimulus at their controversial December vote before additional modest measures were announced.
An account of last year’s final policy meeting, published on Thursday, shows that “some” policymakers wanted the bank to act more aggressively — and more in line with investor expectations — by cutting a benchmark interest rate by more than the 10 basis points it delivered.
Some of the 25 members of the governing council had pushed for a 20 basis point cut to its deposit rate, according to the minutes — a move that would have been more in line with market expectations of a bigger stimulus from the ECB in response to a slowdown in emerging markets.
In the event, most of the council backed ECB chief economist Peter Praet’s call for a 10 basis point cut, which left the deposit rate charged on banks’ reserves parked at the central bank in the region at 0.3 per cent.
The account revealed the possibility was also raised of expanding the monthly volume of asset purchases under the ECB’s landmark quantitative easing programme from the current level of €60bn, or of front-loading asset purchases. The option of extending QE beyond the date Mr Praet tabled — March 2017 — was also considered. While no one backed taking these measures as soon as December, the ECB raised the prospect of more action in 2016 by saying “a reassessment could be made in the future”.
The account also confirmed that the ECB could cut the deposit rate again, saying those in favour of a 10 basis point cut viewed such a move as having “the advantage of leaving some room for further downward adjustments”.
Investors were left disappointed by what was eventually agreed upon, sparking a sharp sell-off in European bonds and equities. Since the meeting, ECB president Mario Draghi has downplayed concerns that his central bank is out of ammunition or is reluctant to act.
Few expect policymakers to unveil fresh measures in seven days’ time, when their next meeting takes place.
“On the one hand, there was a desire by some to ease more than they did, but on the other, there was quite a lot of opposition to doing more sovereign QE unless it’s a last resort. The implication is ‘let’s wait and see’,” said Justin Knight, a rates strategist at UBS. “Under current conditions, we don’t think there will be further major policy announcements from the ECB.”
But the news that minus 0.3 per cent is not the lower limit for interest rates and that the central bank could increase the volume of monthly purchases under QE are likely to buoy hopes that the ECB will act again, should growth and inflation continue to disappoint. The earliest date for more action looks likely to be March, when the ECB’s staff will present a fresh round of projections for inflation and growth in the 19-member region.
In contrast to those advocating extra monetary stimulus, some ECB members had wanted to do less than what was announced. Five members of the governing council wanted the central bank to stick with QE in the form decided last January, according to people familiar with the matter.
Some of those voting against Mr Praet’s proposal were only prepared to lower the deposit rate, though in certain cases by more than the 10 basis points put forward by the ECB’s chief economist. Other dissenters said the existing measures by the ECB “were working in the right direction and more time should be given for them to unfold their full effect”.