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#ECB eyes stimulus package as growth looks weaker - minutes

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A combination of measures may be needed to prop up the eurozone economy, as recent indicators paint an even bleaker picture of the outlook, European Central Bank policymakers said at their July meeting, the accounts of the meeting showed on Thursday (22 August), writes Balazs Koranyi.

With growth and inflation slowing for months, ECB President Mario Draghi has all but promised more stimulus as soon as September. A steady flow of dismal data since the meeting has only reinforced the case for more support.

The accounts of the 25 July meeting showed that include a combination of a rate cuts, asset purchases, changes in the guidance on interest rates and support for banks through partial relief from the ECB’s negative interest rate.

“The view was expressed that the various options should be seen as a package; i.e., a combination of instruments with significant complementarities and synergies,” the ECB said.

“Experience has showed that a package - such as the combination of rate cuts and asset purchases - was more effective than a sequence of selective actions,” it said.

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A multi-tier deposit rate may be among the most controversial measures under consideration. The minutes indicated wide differences among policymakers; some warned about the unintended consequences of such a policy shift.

Markets now expect at least a rate cut of at least 10 basis points and the launch of asset purchases in September. They see a possibility tiering would not be decided at the next meeting.

Rate setters were also divided about whether to redefine the ECB’s policy goal of an inflation rate of just under 2%.

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Draghi said at the press conference following the meeting that extending that to both sides of 2% was considered, and that there would be no cap at that level.

But some of his colleagues seemed to disagree, arguing any discussion about symmetry should go together with a review of the targeted inflation rate or even be part of a broader discussion about the ECB’s policy strategy.

Draghi will hand the reins to Christine Lagarde at the end of October, so he has just two policy meetings left to carry out any changes. He leaves the same day Britain is due to exit the European Union.

Policymakers at the July meeting also expressed concerns as incoming data pointed to another cut in the ECB’s forecasts and as trouble outside the euro zone threatened to infect the bloc’s economy.

But they also noted that the source of troubles is external, with the global trade war, Brexit and China’s slowdown posing the biggest risks.

“Available ‘soft’ indicators at present pointed to slower growth in the third quarter of 2019, raising more general doubts regarding the expected recovery in the second half of the year,” the ECB said.

“Downside risks had become more pervasive and that their persistence could ultimately also necessitate a revision to the baseline growth scenario,” the ECB added.

With a more protracted slowdown, there was also a risk that weakness in industry could spill over into services, since manufacturing tends to be a leading indicator.

The eurozone economy barely grew in the second quarter and Germany, its biggest single economy, may already be in recession. Orders for its manufacturers have dried up, investments slowed and confidence gone into a downward spiral.

Although the domestic economy has held up relatively well, hurt growth, with job creation slowing and confidence in services also waning.

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European Central Bank (ECB)

ECB's Lagarde keeps door open to higher inflation

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Inflation in the eurozone could exceed the European Central Bank's already raised projections but there are few signs of this already happening, ECB President Christine Lagarde (pictured) said on Monday (27 September), writes Balazs Koranyi, Reuters.

"While inflation could prove weaker than foreseen if economic activity were to be affected by a renewed tightening of restrictions, there are some factors that could lead to stronger price pressures than are currently expected," she told lawmakers at the European Parliament.

"But we are seeing limited signs of this risk so far, which means that our baseline scenario continues to foresee inflation remaining below our target over the medium term," she added.

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European Central Bank (ECB)

ECB must tighten policy if needed to counter inflation, Weidmann says

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The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020.   REUTERS/Kai Pfaffenbach

The headquarter of the European Central Bank (ECB) is photographed during sunset, as the spread of the coronavirus disease (COVID-19) continues in Frankfurt, Germany, April 28, 2020. REUTERS/Kai Pfaffenbach

The European Central Bank must tighten monetary policy if it needs to counter inflationary pressures and cannot be put off from doing so by the financing costs of eurozone states, ECB policymaker Jens Weidmann (pictured) told the Welt am Sonntag newspaper, writes Paul Carrel, Reuters.

Eurozone countries have ramped up their borrowing to cope with the coronavirus pandemic, potentially leaving them exposed to increased debt servicing costs if the central bank tightens policy to counter upward pressure on prices.

"The ECB is not there to take care of the solvency protection of the states," said Weidmann, whose role as president of Germany's Bundesbank gives him a seat on the ECB's policymaking Governing Council.

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Should the inflation outlook rise sustainably, the ECB would have to act in line with its price stability objective, Weidmann said. "We have to make it clear again and again that we will tighten monetary policy if the price outlook calls for it.

"We cannot then take into account the financing costs of the states," he added.

After its July 22 policy meeting, the ECB pledged to keep interest rates at record lows for even longer to boost sluggish inflation, and warned that the rapidly spreading Delta variant of the coronavirus posed a risk to the eurozone's recovery. Read more.

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"I do not rule out higher inflation rates," the paper quoted Weidmann as saying. "In any case, I will insist on keeping a close eye on the risk of an excessively high inflation rate and not only on the risk of an excessively low inflation rate."

The euro zone economy grew faster than expected in the second quarter, pulling out of a pandemic-induced recession, while the easing of coronavirus curbs also helped inflation shoot past the ECB's 2% target in July, hitting 2.2%. Read more.

When the ECB decides it is time to tighten policy, Weidmann expected the central bank would first end its PEPP emergency bond purchase programme before scaling back its APP purchase plan.

"The sequence would then be: first we end the PEPP, then the APP is scaled back, and then we can raise interest rates," he said.

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Digital economy

Digital euro: Commission welcomes the launch of the digital euro project by the ECB

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The Commission welcomes the decision taken by the Governing Council of the European Central Bank (ECB) to launch the digital euro project and start its investigation phase. This phase will look at various design options, user requirements and at how financial intermediaries could provide services building on a digital euro. The digital euro, a digital form of central bank money, would offer greater choice to consumers and businesses in situations where physical cash cannot be used. It would support a well-integrated payments sector to respond to new payment needs in Europe.

Taking into account digitalisation, rapid changes in the payments landscape and the emergence of crypto-assets, the digital euro would be a complement to cash, which should remain widely available and useable. It would support a number of policy objectives set out in the Commission's wider digital finance and retail payments strategies including the digitalisation of the European economy, increase the international role of the euro and support the EU's open strategic autonomy. Based on the technical co-operation with the ECB initiated in January, the Commission will continue to work closely with the ECB and the EU institutions throughout the investigation phase in analysing and testing the various design options in view of policy objectives.

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