Officials of the European Central Bank discussed taking more aggressive measures at the March meeting including a larger cut in the main refinancing rate and exempting some deposits from negative rates as the bank struggles to bring inflation to its target and promote economic growth.
“A sharper rate cut could be considered, together with indications that the effective lower bound would have been reached for all practical purposes,” recorded the accounts of the March 10th Governing Council meeting published Thursday. Bank governors debated the possibility of exempting some bank reserves from the negative deposit facility rate but decided that the complexity of the execution made the proposal unworkable.
At that meeting the bank announced a more extensive series of measures than the market had expected. The main refinancing rate was dropped from 0.05 percent to 0.0 percent, the deposit rate was reduced to -0.4 percent from -0.3 percent and the marginal lending facility rate was cut to 0.25 percent from 0.3 percent. The bank also increased the amount of securities it was buying each month from 60 billion euros to 80 billion euros and expanded the type of purchase to some kinds of corporate issues.
Despite these measures the euro has gained 3.4 percent against the dollar to 1.1373 at Thursday’s close, from 1.0999 at the close on March 9th.
Annual inflation in the 19 member currency union has slipped back into deflation in February and March dropping to 0.2 percent and 0.1 percent respectively. Inflation was last at the ECB’s 2 percent target in January 2013. It had dipped into outright price declines twice since, in September 2015 and December 2014 through March 2015.
Bank members are concerned that the steady decline in inflation that has occurred since reaching its post-recession peak of 3.0 percent in November 2011 will begin to change expectations and affect wages and spending. With quarter to quarter economic growth averaging just 0.3 percent for the last two years, even a slight drop in spending could push the Eurozone into recession.
These accounts, the equivalent of the Federal Reserve minutes, are, like the Fed product, edited. They do not reveal which board member advocated for which policies but only that the members agreed on the need for further actions. The incentives for banks that expand their loan book garnered “very broad support,” while extending asset purchases to corporate bonds received only “broad support.”
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