ECB ready to adjust all easing tools, including rates, QE
The ECB, the central bank for the 19 European countries that use the euro currency, said its governing council had asked staff to examine ways to reinforce its forward guidance on policy rates, along with measures that could mitigate the impact of further easing on commercial banks, such as a tiered system of reserve renumeration, along with options of the size and composition of potential new net purchases.
"The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realized and projected, have been persistently below levels that are in line with its aim," the ECB said.
The ECB, which last month delayed any rate hike for the second time in only three months, said it was "determined" to act if inflation continues to fall short of its aim and now expects key interest rates "to remain at their present or lower levels through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term."
In its June guidance the ECB merely said it expected interest rates to remain at their "present levels" at least through the first half of next year, today adding the word "lower."
The ECB's benchmark interest rate, the refinancing rate, has been steady at 0.0 percent since March 2016 and in June last year the ECB was confident an economic slowdown was temporary and began to prepare investors for higher interest rates by the second half of this year.
At that point the ECB also wrapped up its asset purchases, which began in March 2015 and reached some 2.6 trillion euros in December 2018.
But by March this year it became clear the economic slowdown was dragging on and the ECB began pushing back the time frame for any rate hike and launched a new series of long-term lending programs (TLTRO-III) to ensure easy financing in an effort to boost economic growth and inflation.
Today the ECB confirmed it will continue to reinvest and payments from securities purchases under its earlier asset purchase program, know as quantitative easing, for an extended period past the date when it starts to raise interest rate.
"Incoming information since the last Governing Council meeting in June indicates that while further employment gains and increasing wages continue to underpin the resilience of the economy, softening global growth dynamics and weak international trade are still weighing on the euro area outlook," Draghi said, the manufacturing sector is especially affected by uncertainties and the rising threat of protectionism.
The euro area economy expanded by only 1.2 percent year-on-year in the first quarter of this year, the same as in the previous quarter, and Draghi said the latest data point to somewhat slow growth in the second and third quarters of this year, with risks tilted to the downside.
In its quarterly forecast from June the ECB raised its 2019 growth forecast slightly to 1.2 percent from 1.1 percent in March but lowered the 2020 and 2021 forecast to 1.4 percent from 1.6 percent and 1.5 percent, respectively.
Inflation ticked up to 1.3 percent in June from 1.2 percent in May but Draghi expects inflation to decline over coming months due to futures prices for oil, and inflation expectations have declined while underlying inflation remains muted.
In June the ECB raised its 2019 inflation forecast slightly to 1.3 percent from a previous forecast of 1.2 percent but lowered the 2020 forecast to 1.4 percent from 1.5 percent, still well-below the ECB's target of "below, but close to 2 percent."
In a separate statement, the ECB council supported the European Union's council's appointment of Christine Lagarde, managing director of the International Monetary Fund (IMF) since July 2011, as its next president when Draghi's 8-year term expires on Oct. 31.