THE EUROPEAN CENTRAL BANK’S MEETING: a signal to do more

As expected, the European Central Bank did not ease policy when its governing council met today. However, the ECB underlined its determination to take further measures, if necessary, to get inflation, currently just 0.2%, back to the goal of nearly 2%. Speaking at the press conference after the meeting, Mario Draghi, the ECB’s president, stressed the council’s willingness, readiness and capacity to act.

Revised forecasts made clear why the ECB may have to step up its quantitative-easing programme, announced in January and launched in March. Three months ago, central-bank staff envisaged GDP growing by 1.5% this year, 1.9% in 2016 and 2.0% in 2017. These forecasts have been lowered to 1.4%, 1.7% and 1.8% respectively. Mr Draghi said that the downward revisions were mainly because external demand is now expected to be weaker

Inflation is also set to be lower than previously forecast. In June, staff projections showed consumer prices rising by 0.3% in 2015, 1.5% in 2016 and 1.8% in 2017. The latest forecasts are for inflation of only 0.1% this year, rising to 1.1% in 2016 and 1.7% in 2017. These downward revisions have occurred mainly owing to lower than expected oil prices.

Even these lower forecasts may turn out to be over-optimistic since the cut-off points for data were between August 12th and 21st. That meant they did not reflect the panic in financial markets over a Chinese slowdown late last month. The risks to both growth and inflation are on the downside.

What will the ECB do if it does decide the euro area needs yet more monetary stimulus?

 Already interest rates are ultralow, including negative rates on funds deposited by banks with the ECB. The central bank has four more long-term lending operations to make, in which it makes funds available to banks for terms until September 2018 at just 0.05% a year provided that they improve their lending record to the private sector (non-financial firms and households, excluding mortgages). The next of these will take place later this month. Most important, it is creating money to buy €60 billion ($67 billion) of mainly public assets each month.

Further easing seems likely to be through the QE programme. Although the ECB could raise the amount it buys each month, the council’s most likely response is to extend the duration of the programme, which at present is scheduled to end in September 2016. When announcing the programme in January Mr Draghi indicated that it could run longer than that if necessary, since it would be conducted until there was a “sustained adjustment in the path of inflation” consistent with restoring inflation to nearly 2%. The governing council may have held its fire today but the ECB appears to be moving towards such an extension of the programme.