ECB Keeps Options Open on Stimulus

FRANKFURT—A top European Central Bank official cautioned that investors shouldn't assume the bank will aggressively beef up its stimulus next month, saying that no decision has been made and that all options are on the table.

"Sometimes I think people in the financial markets have to brush up on their English lessons to understand when we say nothing yet has been decided for March," ECB Executive Board member Yves Mersch said in an interview with The Wall Street Journal. "It is not our communication which is flawed, it is the hype that is being provoked by people with vested interests."

Mr. Mersch's comments follow a series of speeches by ECB President Mario Draghi underlining the bank's readiness to boost its stimulus next month to combat stubbornly low inflation, and underscore the challenge faced by central bankers as they seek to guide markets with their words, but maintain policy flexibility to adapt to changing circumstances.

Mr. Mersch said the ECB "will obviously reconsider" its slate of stimulus programs at its next scheduled meeting March 10, in light of new economic forecasts that are likely to show weakening inflation. "Everything is on the table," he said.

He also pointed to "a lot of positive developments" in the eurozone economy and a rebound in oil prices, and said investors were misjudging the impact of the ECB's addition to its stimulus at its meeting in December. Stock markets are only about 10% below their record highs, which "is not exactly a crash," he said.

"If you would look at what we communicate, I think this is quite clear. The situation has changed since December, we will re-examine and reassess and possibly, if needed, also correct," said Mr. Mersch, former governor of Luxembourg's central bank, and the longest-serving member of the ECB's 25-member governing.

At a punchy news conference in January, Mr. Draghi surprised investors with a pledge to "review and possibly reconsider" the ECB's stimulus at its March meeting, and not to "give up" in the face of ultralow inflation.

Markets reacted positively to what they interpreted as a strong signal that additional stimulus was imminent, sending eurozone share and bond prices higher and weakening the euro.

Mr. Mersch's comments suggested the ECB believes investors may not have given the bank's December stimulus measures sufficient credit. These included a reduction in the already negative deposit rate, a six-month extension of the quantitative-easing program, and a decision to reinvest principle payments on the bonds it holds. Investors were disappointed by the package, driving stocks lower and the euro higher against the dollar.

"Some of our measures that we have decided in December will last until 2019," said Mr. Mersch, noting that the additional bond buying stimulus in December totaled about €680 billion.

A number of bank economists have recently raised their expectations for the ECB's March meeting. Berenberg, J.P. Morgan and Royal Bank of Scotland now expect the ECB to increase its monthly bond purchases by at least €10 billion from €60 billion currently, and to cut its deposit rate—now at minus -0.3%—by at least a further 0.1 percentage point.

Mr. Draghi has done little to damp investors' hopes. In a speech in Strasbourg on Monday, he warned that inflation was " tangibly weaker" than the bank had expected in December, and reiterated the need to "review and possibly reconsider" the ECB's stimulus in March.

Mr. Mersch said the annual rate of inflation—which was 0.4% in January—would probably turn negative between spring and early summer. "This brings us into a zone of discomfort," he said.

The debate taking place within the ECB is whether to treat this as a temporary response to the sharp drop in oil prices, which could be looked through, or whether it might feed through into wages and other prices.

Jens Weidmann, the President of Germany's central bank, the Deutsche Bundesbank, parked himself firmly in the former camp last week, warning that the ECB shouldn't fixate on current inflation rates "like a rabbit staring at a snake."

Mr. Mersch appeared to sympathize with that position, pointing to positive developments in the eurozone economy, including the drop in oil prices, which gives companies added leeway in making new investments or repairing their balance sheets. Indeed, he said that the bulk of the risks facing the economy are from abroad, including growth concerns in China and other emerging markets.

"If we only had the domestic economy, I would not say that the downside risks have increased. From the domestic point of view, we might be at neutral."

Mr. Mersch, who has been on the ECB's Governing Council since the late 1990s, said the past two decades taught him humility when it comes to fine-tuning the economy.

"I still perceive central banks as being able to have a longer-term view of the situation, and it is quite important to continue to have such an actor in the economy and society," he said.

Write to Tom Fairless at [e-mail] and Brian Blackstone at [e-mail]

(END) Dow Jones Newswires

February 02, 2016 13:35 ET (18:35 GMT)

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