The diverging paths of the main central banks were highlighted yesterday as the
European Central Bank
left the door open to further easing at a time when its counterparts elsewhere are looking to close it.
Until recently, the world’s main central banks have acted broadly in tandem, shoring up their financial systems and economies by cutting rates and offering cheap, plentiful cash.
Now, the relative strength of the US and the British economies means their central banks are steering a different course to the ECB and the Bank of Japan.
The US Federal Reserve announced in December it would begin to slow its purchases of government debt by $10 billion to $75 billion (€55 billion).
Although the Bank of England yesterday left policy unchanged, lower unemployment and fears of a housing boom have prompted calls for the bank to consider raising the cost of borrowing.
ECB president Mario Draghi made clear an increase was off the agenda, with rate-setters on the governing council in Frankfurt declaring their resolve to keep monetary policy very loose far into the future.
Accommodative stance
"The governing council strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary," Mr Draghi said.
“We firmly reiterate our forward guidance that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”
If anything, the euro zone policymakers were prepared to provide more, not less, stimulus to support a recovery that Mr Draghi stressed was weak.
“We remain determined to maintain the high degree of monetary accommodation and to take further decisive action if required,” he said.
Highlighting the differences between the central banks, the euro slumped to its lowest level in a year against the pound and initially dipped against the dollar after Mr Draghi’s remarks.
"The message was clearly one of heightened readiness to ease policy if necessary and the policy or policies that may be used are less constrained than the market thinks," said Mark Wall and Gilles Moec, economists at Deutsche Bank.
Measures
Mr Draghi refused to be drawn on what measures the ECB could take, but comments that the governing council was "ready to use all the instruments that are allowed by the treaty", were interpreted by some that outright purchases of government bonds, or other assets, often referred to as quantitative easing (QE), were more likely than thought.
“The language is a loud verbal intervention for markets; it will be interpreted as QE being within the realm of possibility,” Mr Wall and Mr Moec said.
“We continue to believe the next move will be something modest in terms of impact. But today’s comments signal that the probability of a more substantial policy like QE emerging further down the line is not zero and is rising.”
Ken Wattret, economist at BNP Paribas, said: "This looks like a rather dovish signal, as it is a clear hint that balance sheet expansion through asset purchases is an option."
Mr Draghi indicated two events would jolt the council into action: an “unwarranted” rise in money market rates, charged by banks to lend to one another, or signs that low inflation – which at 0.8 per cent is already less than half the ECB’s target of just below 2 per cent – was affecting medium-term expectations.
If inflation continues to fall, economists expect a cut in the main refinancing rate or a shift into negative deposit rates, which would impose a levy on banks holding reserves at the ECB. – (Copyright The Financial Times Limited, 2014)
