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Low inflation outlook, ECB poised to act

Thursday, May 15 12:29:00

The European Central Bank is working on a broad range of policy tools and is determined to act if needed, top ECB policymakers said as forecasters surveyed by the bank cut their inflation projections.

In Krakow, ECB Executive Board member Yves Mersch said on Thursday the ECB was working on “many instruments” and a broader range than journalists or analysts might think. On Wednesday, Reuters reported the bank was preparing a package of options for its June 5 meeting, including cuts in all its interest rates and measures aimed at boosting lending to small- and medium-sized businesses.

The ECB’s main interest rate now stands at a record low of 0.25 percent and the deposit rate it pays banks for holding their money overnight is at zero. If it cuts the deposit rate, the ECB effectively would charge banks for holding their cash.

Asked about the possibility of negative interest rates, Mersch said in Krakow: “It’s certainly on the shelf if the Governing Council decides. It is a tool that is available.”

ECB President Mario Draghi said last week the Governing Council was “comfortable with acting next time” but wanted to see updated economic projections from the bank’s staff first.

An ECB survey of independent forecasters - as distinct from the bank’s staff forecasts - released on Thursday saw them cut their inflation projections, adding to pressure on the ECB.

“We are determined to act swiftly if required and do not rule out further monetary policy easing,” Constancio said in Berlin.

The Survey of Professional Forecasters, a survey of 55 economists, academics and other professional forecasters throughout the euro zone, showed a 2016 inflation forecast of 1.5 percent, down from 1.7 percent three months ago.

Mersch said he favoured speeding up preparations “so that our instruments are ready”.

“But precise (instruments) you will see after the June meeting. We are working on many instruments,” Mersch said. “We are working on a broader range of instruments than might strike a journalist, or even an analyst.”

Shortly before figures for euro zone first-quarter economic growth were released, Mersch said: “We are still broadly in line with our forecast of a fragile recovery.”

Data then showed economic growth in the region was much weaker than expected in the first quarter and inflation remained stuck below 1 percent in April at 0.7 percent, a modest pick-up from the previous month.

The European Union’s Statistics Office estimated that the economy of the 18 countries sharing the euro expanded only 0.2 percent during the first three months of the year, rather than the 0.4 percent growth expected by economists.

“We are now in a situation of a credit-less recovery in the euro area, with low levels of credit to the private sector”, Constancio said in Berlin.

The sources familiar with measures under preparation for June told Reuters in Wednesday’s story that the tools included a targeted long-term lending operation, or LTRO, which would come with conditions attached on achieving a measurable increase of banks’ lending to small and mid-size companies.

“The first need that we need to address is of credit allocation,” said Mersch. (Reuters)