ECB flags beefed up QE as growth, inflation outlook fades

Thu Sep 3, 2015 11:54am EDT
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By John O'Donnell and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank cut its growth and inflation forecasts on Thursday, warning of possible further trouble from China and paving the way for an expansion of its already massive 1 trillion-euro plus asset-buying program.

The ECB, which left interest rates unchanged in a widely expected decision, said growth would suffer from fading momentum in emerging markets, particularly China, and falling oil prices could drag the 19-member euro zone back into deflation in coming months.

The new projections are a stark admission that Europe's recovery, described by the bank as disappointing, is hardly gaining momentum. Consequently, the ECB may have to roll out new measures, just six months after it began quantitative easing, considered a policy "bazooka" when it was introduced in January.

For the first time, ECB President Mario Draghi said explicitly the bond-buying program may run beyond September 2016 and the bank may adjust its size and composition. As it stands, the ECB is buying 60 billion euros ($66.68 billion) per month asset buys, mostly government bonds.

"There aren’t special limits to the possibilities that the ECB has in gearing up monetary policy," Draghi told a news conference. "The risks to the euro area growth outlook remain on the downside, reflecting in particular the heightened uncertainties related to the external environment."

The euro fell 1 percent against the dollar on Draghi's comments, European stocks rallied and bond yields fell as investors started to price in new policy steps from the bank.

"The words chosen by the ECB suggest that it would not hesitate to raise the size of its asset purchases and prolong them beyond September 2016 if the outlook for growth and inflation weakens further," Holger Schmieding, an economist at Berenberg said.

"As far as such conditional statements go, the ECB was rather clear: It would not take much further turbulence to trigger an ECB response. We can count this as a clear verbal intervention.”   Continued...

European Central Bank president Mario Draghi addresses a news conference at the ECB headquarters in Frankfurt, Germany, September 3, 2015. REUTERS/Ralph Orlowski