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Central banks Updated: 29 May 2018

The ECB prefers non-conventional measures over new interest rate cuts

The latest batch of measures comes almost exactly one year later the ECB announced the purchase of EZ government bonds (March 9th, 2015). According to BBVA Research, with last Thursday’s announcements, the ECB stressed that there is ample room for further measures, dismissing the view that everything is done in terms of easing policy.

Mario Draghi. ECB. European Central Bank

Also, the ECB made it clear that it would opt for further unconventional measures over additional rate cuts. President of the European Central Bank Mario Draghi, emphasized that the ECB is by no means running short of ammunition: Draghi left the door to new interest rate cuts, but also to the adoption of new “non-conventional measures” if necessary.

In a recent note, BBVA Research argued that, despite today´s welcomed announcements, one fact remains: the ECB has less and less margin for maneuver. In the meantime, as reiterated by Draghi, the effectiveness of additional monetary measures diminishes if they are not accompanied by coordinated fiscal stimuli.

Last Thursday, the European Central Bank announced additional measures, as hinted by president Draghi in the institution’s January meeting. The ECB has cut interest rates to new all-time lows (the main policy rate by 5bp to 0%, the deposit facility by 10bp to -0.40% and the marginal lending rate by 5bp to 0.25%) and increased the current monthly pace of purchases from EUR60 billion to EUR80 billion, opening them to include corporate (non-banking) debts. Also, the ECB introduced a new round of liquidity auctions (TLTRO) for Eurozone banks, which will be launched on June 2016.

As regards the economic forecasts for the Eurozone, ECB members reviewed significantly downwards their inflation forecasts (to 0.1% from 1% in 2016, and to 1.3% from 1.6% in 2017). Also, inflation is expected to remain in negative territory in coming months, although it should spike by year end. This forecast review is in line with what BBVA Research economists expected, taking into account the outlook for oil prices.

As regards growth in the euro zone, the ECB has downgraded its forecasts for 2016 (to 1.4% from 1.7%) and 2017 (to 1.7% from 1.9%). In 2018, it expects growth to reach 1.8%.

But above all, the ECB remains alert and ready to take action if necessary, and intends to prioritize - but not rule out - “non-conventional measures" over additional interest rate cuts, according to BBVA Research.