Mon, Jul 18, 2016 - Page 14 News List

ECB expected to pave way for stimulus in September


The European Central Bank (ECB), widely expected to hold fire on monetary policy this week, is to likely prepare the ground for more stimulus measures in September as the economic fallout for the eurozone from Brexit becomes clearer, analysts said.

The ECB’s decisionmaking governing council is scheduled to hold its regular policy meeting on Thursday, a month after Britain voted to quit the EU.

While the initial market turmoil triggered by the shock outcome has abated, taking the heat off the ECB and other major central banks to charge to the rescue immediately, observers believe the true extent of the economic damage would only become discernible later.

British Prime Minister Theresa May has yet to decide when to trigger Article 50 of the Lisbon Treaty, formally notifying Brussels of Britain’s exit and starting a two-year countdown on divorce from the EU.

The full economic consequences of Brexit are only likely to become clear during the negotiations on the terms of its exit. The Bank of England already held fire on an interest rate cut last week, although it flagged it will likely act at its next meeting next month.

The ECB is similarly likely to bide its time, analysts said.

“No further measures are expected at the meeting as the ECB was reported to be relieved about the markets’ rather muted reaction to the Brexit vote,” Commerzbank AG economist Michael Schubert said.

“A monetary reaction appears unlikely to be considered by the council before September,” Schubert said.

So far this year, in a bid to kick-start recovery and drive inflation rates up to levels more compatible with healthy economic growth, the ECB has cut its main refinancing rate to zero, beefed up its asset purchase program known as quantitative easing and launched a new scheme of ultra-cheap loans to banks.

However, eurozone inflation stood at just 0.1 percent last month, a long way off the ECB’s target of close to, but just under, 2 percent.

“But the Brexit vote has increased what were already significant downside risks to the eurozone economy and the inflation outlook remains dismal,” Capital Economics economist Jennifer McKeown said. “We therefore expect the ECB to at least pave the way for more policy support in September, probably involving an interest rate cut and bigger asset purchases.”

“In the post-Brexit vote world, even though financial markets have calmed somewhat in recent days, the ECB’s concerns have increased,” ING DiBa economist Carsten Brzeski said. “The economic recovery of the eurozone is again at risk, inflation could be lower and, above all, the future of the entire eurozone has never been shakier and more unclear than at present.”

Nevertheless, even if the ECB does move again in September, analysts were divided about the effectiveness of further rate cuts with borrowing costs already at all-time lows.

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