ECB cuts forecasts amid doubts

The European Central Bank cut its inflation and growth forecasts for the eurozone yesterday as its president said things could get worse.

The euro fell 1% on the moves and comments, hitting a two-week low.

ECB president Mario Draghi pledged to beef up or prolong the bank’s bond-buying programme if the picture darkened further, although he said 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.

Draghi said the bank’s €1tn-plus asset-buying programme was working smoothly, if slowly, and the policy-making Governing Council was ready and willing to take further policy action but decided it would 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% from 25%, provided that did not give it a blocking minority among bondholders.

The bank forecast that inflation would be a mere 0.1% this year, 1.1% in 2016, and 1.7% in 2017, compared with its June projections of 0.3, 1.5 and 1.8%.

It lowered its forecast for growth in the 19-nation eurozone to 1.4% in 2015, 1.7% next year and 1.8% in 2017, from June projections of 1.5, 1.9, and 2.0%.

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.

The ECB launched its €60bn ($68bn) per month quantitative easing programme in March to boost consumer prices after a short bout of deflation. It is due to run until September 2016 but Draghi clearly hinted it could be extended.

The International Monetary Fund argued yesterday that the ECB should consider extending quantitative easing, 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% 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.

A majority of analysts polled by Reuters expect the ECB eventually to extend or increase its asset purchases.

“Even if it appears too early to expect them to announce additional quantitative easing, central bank president Draghi should consider a more dovish rhetoric in order to prevent inflation expectations from falling further,” Crédit Agricole said in a note to clients.

Peter Praet, the bank’s chief economist, has said markets should not doubt the ECB’s “willingness and ability” to act.

However, comments from other rate setters such as Benoit Coeure and vice president Vitor Constancio suggest the bank will want to take time before taking action.


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