ECB cuts inflation forecast as Draghi pledges low interest rates

Economic Forecasts

“The recovery is weak,” said Anders Svendsen, an economist at Nordea Bank Denmark A/S in Copenhagen. “Risks are clearly skewed toward another rate cut and the door is likely to be left wide open to all non-conventional measures.”

Euro-area inflation was 0.9% in November, compared with the ECB’s target of just under 2%, and prices are stagnating or declining on an annual basis in five of the 17 euro nations. That means economists and investors have been awaiting economic projections for 2015 to gauge the ECB’s need to act.

ECB Governing Council member Ardo Hansson said in an interview on Nov. 22 that policy makers haven’t “fully exhausted” their room to cut interest rates yet and have a variety of “other measures” at their disposal if needed.

One unprecedented option that officials have discussed is charging banks for the excess liquidity they park at the ECB, which would make it the first major central bank to venture into negative deposit rates.

Smaller Cut

One risk of such a move is that banks are unable to pass the cost onto their depositors, squeezing their profit margins and deterring them from lending to companies, households or each other.

Bloomberg News reported on Nov. 20. that officials are weighing a smaller-than-usual cut in the deposit rate to minus 0.1% to minimize any disturbance. ECB Vice President Vitor Constancio said in an interview on Nov. 27 that the policy would be invoked only in “quite extreme situations” and the council is “not really near a decision.”

For now, Constancio says that banks’ access to funding has improved and “is not the main cause of concern,” suggesting that measures to increase liquidity such as new long-term loans aren’t imminent. Banks have returned almost 40% of the 1 trillion euros ($1.4 trillion) in emergency cash they borrowed for three years at the height of the financial crisis in 2011 and 2012.

“The ECB’s job is far from done and more action is likely in the coming months,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “But none of the possible steps are without risk. The ECB will need to find the right balance between being bold and reckless.”

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