The European Central Bank cut its inflation and growth forecasts for the eurozone yesterday and its president said things could get worse.
The bank pledged to beef up or prolong its bond-buying programme if the picture indeed darkened further, although no one on the bank’s Governing Council had argued for it now.
The ECB, which left interest rates unchanged in a widely predicted decision, said the chances of missing its medium-term inflation target had increased due to lower oil prices, weaker growth in China and other emerging markets and an appreciating euro.
Mario Draghi, the ECB president, said the bank’s €1 trillion asset-buying programme was working smoothly, if slowly, and the policymaking Governing Council was ready and willing to take further policy action but decided it would be premature to do so now.
“In particular [the Council] recalls that the asset purchase programme provides sufficient flexibility in terms of adjusting the size, composition and duration of the programme,” he told a news conference.
In one small change to the quantitative easing programme, the bank agreed to increase the share of any sovereign bond issue it could buy to 33 per cent from 25 per cent, provided that did not give it a blocking minority among bondholders. The ECB quantitative easing programme is due to run until September 2016 but Draghi clearly hinted it could be extended.
The ECB forecast that inflation would be a mere 0.1 per cent this year, 1.1 per cent in 2016 and 1.7 per cent in 2017, compared with its June projections of 0.3, 1.5 and 1.8 per cent respectively.
It lowered its forecast for growth in the 19-nation euro area to 1.4 per cent in 2015, 1.7 per cent next year and 1.8 per cent in 2017, from June projections of 1.5, 1.9 and 2 per cent respectively.
The forecasts, meanwhile, were compiled based on data taken before August 12 and did not take into account the latest sharp economic deterioration in China, which posed “downside risks to the projections themselves”, Draghi said.
However, he said the council tended to think the weaker inflation outlook was due to “transitory effects” but would closely monitor all relevant factors.
Draghi confirmed the ECB had cut Emergency Liquidity Assistance to Greek banks for the second time in two weeks.
The International Monetary Fund argued yesterday that the ECB should consider extending QE, citing a rise in downside risks to the global economy due to a combination of threats, including China’s slowdown and rising market volatility.
Oil prices are down 35 per cent since May, iron ore is near an all-time low, the euro has unexpectedly firmed and Chinese growth, already a worry for the ECB in July, is slowing sharply.
Draghi highlighted some of the positive impacts of QE, even though inflation has stayed below two per cent since early 2013. Lending to eurozone firms in July grew at the fastest pace since early 2012, unemployment fell and the composite purchasing manager’s index unexpectedly rose, offering a glimmer of hope that growth may be picking up after a lacklustre second quarter.