Bleak ECB minutes point to further stimulus

Posted on November 17, 2016

The European Central Bank looks set to approve more bond purchases to boost the eurozone’s fragile recovery after its governing council delivered a bleak assessment of economic prospects.

Analysts expect the council to make a decision in early December on whether to extend its landmark quantitative easing programme past the deadline of March 2017. The minutes of the council’s 17 October meeting, published on Thursday, indicate an extension is likely, revealing the group of 25 officials is becoming increasingly concerned about the region’s recovery.

The single currency area’s recovery remains exposed to global risks, despite a large-scale quantitative easing package in which the region’s central bankers have spent €1.4tn on bonds and cut rates deep into negative territory.

The minutes said governing council members noted that “the outlook for a continued cyclical recovery was based on exceptionally supportive financing conditions, which benefited to a large extent from the ECB’s monetary policy measures”.

Fears over mounting protectionism, paltry wage growth and a lack of investment were among the risks flagged in the minutes. The concerns over trade and investment are likely to have increased since the election of Donald Trump as US president, who pledged to protect American jobs by imposing import tariffs.

Vítor Constâncio, the ECB’s vice-president, warned this week that Mr Trump’s win posed a threat to eurozone growth, adding to unusually high uncertainty. This tends to weigh on investment, as businesses delay decisions until they become more confident in the economic outlook.

Significantly, for an institution whose sole official policy goal is an inflation target of less than 2 per cent, officials believed risks to growth could slow down inflation — which at 0.5 per cent remained much too weak.

While officials believed they did not yet have enough information to justify unleashing a fresh round of bond purchases, most agreed that they would be in a better position to do so by the time of the next policy vote on December 8.

The council will decide then whether to extend quantitative easing at the current pace of €80bn worth of bond purchases a month. It could also announce changes to the design of the programme, to enable it to counter scarcity in assets eligible for the eurozone’s central bankers to buy.

The minutes will add to expectations that the ECB will continue to buy bonds at the same rate until at least the second half of 2017.

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