FRANKFURT, Germany – European Central Bank officials signaled at their June policy meeting that they will consider injecting fresh stimulus into the eurozone economy through interest-rate cuts or the relaunch of a 2.6 trillion euros ($2.9 trillion) bond-buying program, amid deep concerns over slowing global growth and trade disputes.
The aggressive message, which emerged from minutes of the June 5-6 meeting published on Thursday, came on the heels of remarks Wednesday by Federal Reserve Chairman Jerome Powell that the US central bank will also likely ease policy soon. This puts the world’s two biggest central banks on the cusp of injecting fresh stimulus into their economies to ward off a global slowdown and weak inflation.
ECB officials were in “broad agreement” at their June meeting that the bank should “be ready and prepared to ease the monetary policy stance further by adjusting all of its instruments,” according to the minutes.
While the exact timing of any ECB action remains unclear, analysts said the bank could cut its key interest rate, currently set at minus 0.4 percent, as soon as its next policy meeting on July 25. More likely, the ECB could clearly signal a rate cut at its July meeting, and follow through on Sept. 12, when policy makers will have fresh economic forecasts for growth and inflation.
Central banks have shifted their focus toward interest-rate cuts in recent weeks amid lingering international trade tensions and softness in key emerging markets such as China. Many central banks in the Asia-Pacific region, including Australia and New Zealand, have already lowered interest rates. Powell signaled in Congressional testimony on Wednesday that the US central bank could cut interest rates as soon as this month.
ECB President Mario Draghi indicated in a speech in Sintra, Portugal last month that the eurozone central bank could follow suit within weeks unless the economy improved, buoying financial markets. But it wasn’t immediately clear if the rest of the ECB’s 25-member rate-setting committee was on board.
The message went further than the one delivered by Draghi only two weeks earlier, after the ECB’s June policy meeting, stating that fresh stimulus would be forthcoming only if the economy deteriorated.
Thursday’s minutes show there was broad support at the June meeting for an aggressive approach. Officials noted that they should be ready to use all policy tools, including rate cuts and fresh bond purchases, “in the light of the heightened uncertainty which was likely to extend further into the future.”
The eurozone economy performed better than expected in the first three months of the year, but the June minutes revealed deep concerns that global uncertainties will weigh on the region’s economy for some time.
In particular, ECB officials highlighted a downward shift in market expectations of future inflation rates, which have fallen “near the previous lows recorded in September 2016.” The ECB has previously used weakening inflation expectations to justify aggressive stimulus measures.
“Inflation was still projected to reach only 1.6 percent in 2021, which was seen to remain some distance away from the Governing Council’s inflation aim,” the minutes said. The ECB aims to keep inflation just below 2% over the medium term.
“It was hence considered important for the Governing Council to demonstrate its determination to act... and to further prepare for adverse contingencies in the period ahead,” the minutes said.
The ECB is considering major policy moves at a time of significant change at the top of the institution: Draghi will step down on Oct. 31 and is likely to be replaced by Christine Lagarde, the current Managing Director of the International Monetary Fund. The ECB’s chief economist, Peter Praet, left at the end of May.
Meanwhile, some investors question how much impact a new stimulus package would actually have. Borrowing costs are already very low across the eurozone, and the ECB appears to be running out of room to cut interest rates or buy more bonds.
The June minutes suggested that the ECB might be able to find creative ways to expand its toolbox. Officials argued that “considerations of a more strategic nature might be warranted in order to reinforce the credibility of the ECB’s monetary policy.”
Draghi has hinted recently at raising self-imposed limits on the bank’s bond-buying program, although such a move could trigger fresh legal concerns in Germany, the region’s largest economy.
“We certainly have the tools and we have a good performance record in responding to various sources of risks,” the ECB’s recently-appointed chief economist, Philip Lane, wrote Tuesday in a question-and-answer session on Twitter.
“Pro-active measures (including negative rates) are the surest way to ensure inflation climbs to our aim.”