Brussels, 07/11/2013 (Agence Europe) - The European Central Bank says that the eurozone economy will experience a prolonged period of low inflation without the risk of deflation, but on Thursday 7 November, it nevertheless decided to cut the major refinancing interest rate to the record low of 0.25% and the marginal loan facility rate to 0.75%, leaving the deposit facility unchanged at 0%. The markets were taken by surprise and did not react with much enthusiasm.
The head of the ECB, Mario Draghi, said that since its last analysis, the ECB had seen significant shifts in terms of scale and duration. Despite the green shoots of recovery, unemployment remains very high and the adjustment of the private and public sectors is continuing to have a negative impact on the eurozone economy. Moreover, as the ECB's mission is to keep inflation at or around the 2% level, the fall in inflation has been sharper than expected. Eurostat says inflation in the eurozone fell to 1.1% in September and 0.7% in October, raising fears of a Japanese-style deflation.
Deflation here means a self-generating fall in prices for a wide range of categories of goods in a large number of countries. Draghi said that overall, the ECB did not expect deflation, but rather a long period of low inflation, apart from in a single country (referring to Greece). He said there would be more details in December about what exactly was meant by a long period.
The discussion about interest rates focused on the timing rather than whether a cut in rates was required as such. Draghi said that a significant majority of central bankers say that there is sufficient proof to take action, but others say that information that will become available in December could change the ECB's analysis. Justifying the interest rate decisions, he said the effectiveness of monetary policies was considerably reduced in periods of low inflation.
The ECB decided to continue with quantitative easing and extend its normal or exceptional bank refinancing measures until July 2015. Draghi said the option of a new LTRO injection of cheap capital had not been discussed in any detail.
Asset Quality Review. Commenting on the Asset Quality Review of banks to be carried out by the ECB before it becomes the eurozone's bank supervisor in November 2014, Draghi said that the main aim was to shed credible light on the European bank sector, which is what the market wants in order to be able to put its money into the sector. He said that work was ongoing with the European Commission on the best way of carrying out the bail-ins introduced into the EU's new state aid rules for solvent banks that are short of capital.
The head of the ECB hailed the success of the Irish structural adjustment programme (see EUROPE 10957), saying that he refused to “interfere” in the Irish government's decision about whether or not to request preventive aid from the eurozone to ensure a smooth return to the money markets. In Dublin, where the troika of lenders (European Commission, ECB and International Monetary Fund) have completed their assessment mission, Irish Finance Minister Michael Noonan is reported in the Irish Times as saying that any decision on the matter would be taken before the end of the programme.
On Thursday, the ECB drew up its shortlist of candidates to chair the bank supervision committee to be created at the ECB. The list will be submitted to the European Parliament on Friday. (MB/transl.fl)