ECB to keep door open to new easing

The European Central Bank is set to hold the door open for further easing at its policy meeting this week, after measures taken in December to drive eurozone inflation higher disappointed investors, analysts said.
"After disappointing markets in December, we expect the ECB to indicate at its forthcoming meeting that the door is still open to bolder policy support," said Capital Economics economist Jennifer McKeown.

The ECB "is unlikely to alter policy for now given the firm tone of recent survey data and the damage that such a change of heart might do to its credibility," McKeown said.

"However, if growth slows in the coming months and inflation expectations weaken as we expect, it may not be long before the ECB concedes that it must do more."

In the wake of its December meeting, the ECB has come under fire for failing to act as decisively as expected to rekindle inflation, with market players suspecting divisions among the bank's top brass stopping it from doing more.

Area-wide inflation stood at just 0.2 percent in December, a long way off the ECB's target of close to but just below 2.0 percent.

ECB watchers accused bank chief Mario Draghi of undermining the bank's credibility and even jeopardising the ability of the eurozone economy to get back on its feet as the policy measures fell short of the high expectations the ECB officials had themselves helped fuel.

Speculation had swirled for weeks that the ECB would aggressively ramp up its bond-buying programme and further loosen monetary policy to inject some vim into a eurozone beset by years of torpid growth and stagnant inflation.

But in the end, the ECB cut its key "deposit" rate by a modest 0.10 percent to minus 0.30 percent and extended the length of its bond purchases by just six months to March 2017.

The ECB's deputy president Vitor Constancio conceded that mistakes had been made in communicating the bank's intentions, pointing to "the largest gulf so far between what we intended to do and what the markets expected."

Both sides needed to learn lessons, Constancio said in a newspaper interview published at the end of December.

- Need to 'communicate better' -

"The markets need to understand our decision-making processes better, and must not allow themselves to get carried away by wishful thinking. But we also have to communicate better. We made the decision that we wanted to make. However, we did not want to give the markets such a surprise."

It was "difficult enough to calibrate monetary policy correctly. But it is even more difficult to fine-tune market expectations. Sometimes our statements are over-interpreted," Constancio said.

Commerzbank economist Michael Schubert said Draghi was likely to tread very carefully at his post-meeting news conference on Thursday.

"We expect no new steps at (this week's) meeting. Draghi will probably keep all options open while avoiding clear signals. (He) may express himself more carefully than he did recently," Schubert said.

According to the minutes of the December meeting, published last week, the 25-member governing council appears to be divided about the need for more policy action.

"In sum, most members" supported the measures taken, even if "some members did not, on balance, see a sufficient case for further policy action or were only prepared to support some of the elements put forward," the minutes revealed, which are published four weeks after each meeting.

And the ECB takes great pains not to name the particular council members who voted for or against specific measures.

But the minutes said that "some" members had argued "that the existing policy measures ... should be given for them to unfold their full effect ... before adopting further monetary policy measures" -- a point often made publicly by Germany's central bank chief Jens Weidmann.

ING DiBa economist Carsten Brzeski believed it would take a "substantial deterioration" in the eurozone's inflation outlook for the ECB to act again.