The outcome of last Thursday’s meeting of the European Central Bank (ECB) Governing Council was in line with market expectations, with no changes to monetary policy. Thus, purchases of securities under its quantitive easing (QE) programme will continue to run at a rate of €60bn per month until at least September 2016, with interest rates staying at virtually zero.
However, the ECB emphasised its willingness to loosen even further if warranted, by using all the instruments available within its mandate, in particular by adjusting the size and duration of its QE programme.
Thus it is clear that the ECB has a bias towards further easing and is prepared to take additional action, if required, to meet its inflation objective.
It indicated, though, that it was too early to conclude whether recent developments in China and financial markets would have a lasting impact on inflation.
It vowed, though, to closely monitor all relevant incoming information in this regard.
In terms of its assessment of the macro backdrop, the ECB noted that the economic recovery is continuing, though at a somewhat weaker pace than expected. Meanwhile, inflation is also a bit lower than anticipated.
Furthermore, the ECB highlighted that renewed downside risks to the outlook for growth and inflation have emerged recently.
The latest set of ECB staff quarterly economic projections, published last week, contained downward revisions to both inflation and growth forecasts.
ECB staff now see inflation averaging just 0.1% in 2015 and 1.1% in 2016.
These are significantly lower than the previous estimates of 0.3% and 1.5%, largely due to the sharp fall in oil prices since early in the summer.
Inflation is seen averaging 1.7% in 2017. GDP is now forecast to rise by 1.7% and 1.8% in 2016 and 2017 respectively, a cut of 0.2% for both years compared to the previous forecasts.
Growth in 2015 is forecast at 1.4%. Thus, the ECB does not see the recovery gaining much further momentum.
Recent data on the eurozone economy are consistent with this view.
The economy expanded by 0.3% in the second quarter, after registering growth of 0.4% in the previous two quarters.
In terms of the current quarter, leading indicators of activity suggest that the economy has maintained its modest rate of growth.
The key composite purchasing managers index averaged 54.1 in July/August, which is broadly in line with the second quarter average of 53.9.
Meanwhile, the EC economic sentiment index averaged 104.1 in July/August versus 103.7 in quarter two.
At a national level, important indicators such as the German Ifo, French INSEE, and Italian ISTAT surveys have also shown little change in recent months, pointing to continuing moderate growth.
Economic growth, albeit modest in pace, is having a positive impact on the labour market.
Employment growth has picked up to close to 1% on an annual basis. Meanwhile, the unemployment rate fell to 10.9% in July, its lowest level since February 2012.
There was a reaction by markets to the ECB comments about further policy easing and the emergence of fresh downside risks to growth and inflation.
The euro fell, eurozone bond yields moved lower, while European stock markets made some gains.
The euro is now back trading at $1.11-$1.12 and so has surrendered virtually all the gains that it made against the dollar in the aftermath of the surprise devaluation of the Chinese renminbi.
The latest ECB comments support market expectations that interest rates are set to remain around zero for a very long time in the eurozone.
Futures contracts are not pricing in any rate increase until the second half of 2018, and do not see official rates rising to one per cent until 2021.
Thus, it would appear that we are looking at a continuing very low interest rate environment in the eurozone for years to come.
Oliver Mangan is chief economist at AIB. His views are his own
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