SMM News: in the minutes of its June meeting released on Thursday, the European Central Bank said it needed to be prepared to take action: options include changing guidelines, cutting interest rates and buying bonds, as well as possible "more strategic" action. At the same time, the latest eurozone report released by the IMF shows that Lagarde, the next European bank chief, has supported the ECB's easing policy and urged an extension of the easing period.
ECB policymakers who attended the meeting last month agreed on the need to prepare for more stimulus for the eurozone economy in an environment of "increased uncertainty", according to the minutes of the meeting.
The international trade situation has hurt the interests of eurozone exporters, the Fed is widely expected to cut interest rates, and the European Central Bank is under pressure to relax policy again.
The ECB governing Council delayed raising interest rates by at least a year at its meeting on June 5-6. ECB President Draghi stressed that the ECB is likely to take more stimulus measures in the coming weeks.
The minutes of the meeting show that there was a "broad consensus" on the issue last month, and interest rate cuts, policy guidelines and even the introduction of a new asset purchase programme, a tiered interest rate programme, have been put on the agenda.
There is a general consensus among policymakers that, given the increased uncertainty and likely to continue further in the future, the ECB governing Council needs to be prepared to further relax its monetary policy position.
The minutes also show that the ECB is considering "more strategic" measures while inflation remains low and plans to emphasize that the ECB will tolerate inflation above or below its target of just below 2 per cent.
Policy makers said prices were now forecast to grow at an annual rate of 1.6 per cent in 2021, which was "still some way off" from the target and said there was "no room for complacency" in the face of plummeting inflation expectations in financial markets.
The most widely watched market indicator of long-term inflation expectations in the eurozone, the five-year forward break-even inflation rate, shows that prices are expected to rise by just 1.2 per cent. European Central Bank Executive Board Kohl said such pessimistic expectations suggest that such indicators can only be dubious and that professional forecasters and households are more optimistic. He also said that the pessimistic expectations currently digested by the bond markets may not necessarily herald downward pressure on inflation in the future-at least not to the same extent as bonds.
The IMF: needs to extend monetary policy easing and urge the European Central Bank to implement stimulus
In support of the ECB's long-term monetary easing policy, the International Monetary Fund (IMF) said in an annual report on Thursday that the IMF was sceptical about tiered interest rates and warned of the risks of the Bank of Europe's long-term refinancing operation TLTRO. This is the last euro zone report released by Ms Lagarde's former IMF as president of the European Central Bank.
In its report, the IMF noted that the eurozone economy was at risk from trade tensions, Brexit and Italy, and said it supported the ECB's new stimulus package and needed to extend monetary easing. The ECB's plan to keep monetary policy loose is "crucial" as the eurozone faces "long-term economic growth and low inflation".
The report also said that despite the appreciation last year, the euro was still slightly undervalued. The IMF urged countries with large trade surpluses, such as Germany and the Netherlands, to invest more to help rebalance the euro.
The IMF expects output growth in the 19 eurozone countries to slow to 1.3 per cent this year from 1.9 per cent in 2018 and rebound to 1.6 per cent in 2020. The IMF's forecast is slightly better than the figures released by the European Commission on Wednesday, which forecast growth of 1.2 per cent and 1.4 per cent for the eurozone this year and next, respectively.
However, IMF believes the risks are increasing because of the uncertainty created by the confusion on the road to Brexit and the hidden dangers posed by Italy's huge debt.
Although Italian bond yields have fallen recently, market confidence cannot be ruled out or has changed, the report said. IMF believes that this could force the Italian government, which originally opposed the EU budget deficit report, to adopt "substantial fiscal tightening" despite slowing economic growth, which could affect the rest of the euro zone.
IMF: questions ECB's tiered interest rate plan
IMF questioned the tiered deposit rate scheme, saying it would reduce the fees banks pay for some of the excess reserves.
The positive impact of negative interest rates may outweigh their costs, according to the IMF report. The impact of the hierarchical interest rate system on the overall profitability of banks will be very small, and the impact on credit conditions is also questionable.
However, IMF believes that if inflation expectations worsen further, more easing measures may be needed, or include a new asset purchase program.
The ECB governing Council is scheduled to hold its next monetary policy meeting on July 24-25, when Mr Draghi said he would ease monetary policy again in recent weeks and would propose a plan for tiered interest rates for the banking sector at the meeting. But it is worth noting that Lagarde, the next head of the European bank, raised questions about the plan in her IMF report or changed the bank's asset purchase programme after taking office in October. In addition, Mr Draghi may respond to interest rate cuts before leaving office to support the easing policies of the next president.
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