Sound bites: ECB policy unchanged, but leaving them a lot to do

No surprises that the ECB have left policy unchanged as they wait for the next spark for action. The ECB needs to look no further than the economy for clear signs that they have a lot more easing to do. The Eurozone economy is crying out for easier monetary policy. Inflation and money supply growth falling well below target, the domestic credit contraction and chronic recession all underline that the ECB’s monetary policy settings are still far too tight. Draghi is clearly poised to cut rates again at some stage. The problem is that they are running out of ammunition with lower rates as a policy stimulant. There is probably only one more rate cut bullet left in the bag. The marginal effect of one further quarter point rate cut will be next to nothing other than symbolic.

It is down to much more conventional monetary easing and the introduction of ‘special’ measures to get the recovery underway and to avoid the risk of Eurozone deflation going viral. Germany’s economy may be doing ok and keeping its head above water, but most of the rest of the Eurozone is drowning in recession. It is time to act and act soon. The ECB needs to lubricate prospects for recovery with much better access to cheap credit for consumers and small and medium sized enterprises. The continuing contraction in Eurozone private sector loans underlines that the money already released by the ECB into the system is not getting through to borrowers. This is not a demand problem, but a supply constraint. The banks are keeping back ECB funding for their own prudential balance sheet protection. If the banks are holding up funding going into the economy, then they are starving recovery of vital sustenance. The ECB needs to act on this fast and impose lending incentives for the banks. At some stage, the ECB will also need to exorcise their demons and consider quantitative easing as another vehicle for pump-priming recovery. After all, if it has worked for the US and is starting to bear fruit in Japan, it needs careful consideration in the Eurozone now.