ECB cuts eurozone growth forecasts and fails to deliver QE for Christmas

The European Central Bank has cut its growth forecasts for the eurozone, piling on the gloom even as it failed to deliver an early Christmas present in the form of more stimulus.

The ECB’s president, Mario Draghi, said the governing council would reassess in early 2015 the policy measures it had already taken before deciding whether to try and breathe some life into the region’s stagnating economy.

Some investors were left disappointed that he did not announce a programme of full-blown quantitative easing (QE), where the central bank would buy government bonds to stave off a deflationary spiral. However, Draghi suggested he would not allow opposition from Germany, which has been a staunch opponent of QE in the eurozone, to stop a programme if it was considered necessary.

“Do we need to have unanimity to proceed on QE or can we have a majority? I think we don’t need unanimity,” he said, in what was interpreted as a strong signal to Germany’s Bundesbank policymakers.

Timo del Carpio, European economist at RBC Capital Markets, said “Christmas has been delayed” after the ECB’s failure to announce QE. “In its final meeting of the year, the governing council failed to bestow any new holiday gifts for the euro area economy,” he said. “[They] did, however, manage to keep the prospect of further support in the New Year very much alive.”

Draghi said policymakers would wait before potentially changing “the size, the pace and the composition of our measures”.

The ECB cut its 2014 growth forecast for the eurozone to 0.8% from the 0.9% it was predicting three months ago. The downgrades were sharper for 2015 and 2016. Growth next year is expected to be 1%, down from the earlier forecast of 1.6%, while the 2016 forecast was cut to 1.5% from 1.9%.

Draghi warned risks remained that growth would come in even weaker. “In particular, the weak euro area growth momentum, along with high geopolitical risks, has the potential to dampen confidence and especially private investment,” he said.

The ECB also lowered its inflation target following steep falls in the oil price with the annual rate expected to be just 1.6% even in 2016, still below its target of close to but below 2%. Eurozone inflation is currently just 0.3%.

The next meeting of the governing council, on 22 January, could be a crucial point for the ECB as it updates the market on its policy decisions.

Europe’s major markets closed down yesterday after the central bank’s failure to announce QE, including the FTSE 100 which fell by 0.5%.

Jasper Lawler, market analyst at CMC Markets UK, said: “Shares in Europe plummeted today alongside expectations of further ECB intervention after the central bank revised down its economic forecasts but nevertheless left interest rates unchanged and announced no extraordinary further policy action.

“[Mario Draghi] has been walking a tightrope of keeping expectations of quantitative easing alive while acknowledging that the governing council has not reached consensus that this is the best course of action to fulfil its mandate of price stability.”

Draghi and his colleagues on the central bank’s governing council have announced various policy measures over the past years, including in effect charging banks to park money at the ECB by imposing a negative interest rate on deposits, in an attempt to encourage them to lend more to businesses and consumers. However, so far it has stopped short of full-blown QE despite mounting concerns over the eurozone’s ability to shake off the crisis and begin a sustainable recovery.

The UK and the US central banks have engaged in wide-scale QE programmes to help drag their economies out of crisis, and Draghi saidon Thursday: “QE has been shown to be effective in the United States and UK.”

Dropping more hints he was in favour of the eurozone’s own form of the measure, Draghi said hitting the ECB’s inflation target remained the priority. “We have to remember that we have a mandate, and as I said before, we don’t tolerate prolonged deviations from our mandate.”

Bank of England policymakers will closely watch any movement from the ECB in the new year, having persistently warned that a sluggish economy in the eurozone – Britain’s largest trading partner – is among the major threats to the UK recovery.