ECB could signal new action amid falling oil prices, tepid inflation

The European Central Bank could open the door this week to further monetary action in the coming months, prompted by a sharp fall in oil prices and worries that weak growth in China could hit the global economic outlook.

Six weeks ago, ECB chief Mario Draghi unveiled a new package of monetary stimulus measures aimed at fueling inflationary pressures in the eurozone and firing up the 19-member currency bloc's economy.

Since then, a renewed slide in oil prices and financial market turbulence unleashed by worries about China have raised doubts about the ECB's chances of reaching its 2-per-cent inflation target and building on the eurozone's recent modest economic performance.

"We expect the ECB to ease policy further in 2016 as deflationary pressures worsen," said Barclays economist Philippe Gudin, who expects inflation to slump back into negative territory in the next six months.

Analysts are expecting that the ECB will leave its benchmark refinancing rate on hold at 0.05 per cent this week.

Many analysts also believe that Draghi could hint at further monetary action in the coming months such as expanding the ECB's bond-buying programme or trimming interest rates again if both economic growth and inflation come in lower than forecast.

Draghi's announcement in December fell short of financial markets' rather high expectations of what the bank was planning.

In December, the ECB agreed to extend its asset purchases from September this year until at least March 2017 and to lower its deposit rate deeper into negative territory. The deposit rate is what commercial banks are charged for parking funds at the Frankfurt-based central bank.

At the December meeting, ECB policy makers discussed taking bolder action than the measures announced by Draghi, according to the meeting's minutes.

But the policy makers ended up having to reach a compromise amid divisions on the growth and inflation outlook.

Eurozone consumer prices have barely risen since the ECB formally last year launched an asset purchase programme, which targets buying assets amounting to 60 billion euros (66 billion dollar) per month.

Inflation data released on Tuesday by the European Union statistics office Eurostat showed consumer prices coming in at 0.2 per cent year on year in December, which is well below the bank's target annual inflation rate of just below 2 per cent.

Eurostat also revised down the November figure to 0.1 per cent from an originally estimated 0.2 per cent with falling energy costs acting as a brake on consumer prices as 2015 came to an end.

However, oil prices have fallen by about 25 per cent since the start of the year as investors worry that a slowdown in China and other major emerging markets will hit the global economy.

Iran's announcement that it plans to boost both its production and export of oil following the lifting of international sanctions pushed the oil price down to a 12-year-low this week.

The depressed state of oil prices now raises the prospect of the ECB bolstering its monetary stimulus programmes as early as its March meeting, when it releases new inflation and economic growth forecasts.

The ECB is also set to conduct a review of its asset purchasing scheme in March.

Last update: Fri, 24/06/2016 - 08:49

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