ECB holds key rates unchanged amid market volatility

The European Central Bank held its monetary policy steady at its first meeting of 2016 Thursday, but is expected to keep the door open for more stimulus later, in the face of recent financial market turmoil, analysts said.

As widely expected, the ECB held its main "refi" borrowing rate at 0.05 percent, where it has been since September 2014. 

And it also left its other two lending rates -- the marginal lending rate and the deposit rate -- unchanged at 0.30 percent and minus 0.30 percent respectively.

ECB chief Mario Draghi was scheduled to explain the reasoning behind the latest decision at his regular post-meeting news conference.

But analysts said they expected him to keep the door open for more stimulus later, in the face of recent financial market turmoil. 

At its last meeting in December, the ECB had cut its key "deposit" rate by a modest 0.10 percentage point to minus 0.30 percent and extended the length of its asset purchase programme known as quantitative easing or QE by six months to March 2017.

Those decisions had disappointed financial market players who had expected much more decisive action.

"While it comes as no real surprise that the ECB has kept policy on hold for now, Draghi is likely to leave the door wide open to further policy loosening quite soon," said Capital Economics economist Jennifer McKeown. 

Draghi would "likely voice serious concerns over recent financial market turmoil," the expert said.

And "he might hint that the balance of opinion on the governing council is moving in favour of (those) who wanted to expand the QE programme more decisively last month."

According to the minutes of the December meeting, the 25-member governing council appeared to have been divided about the need for more policy action.

McKeown said that the markets "would be forgiven for taking such hints with a pinch of salt," following the widespread disappointment last month. 

But she was confident the ECB would move later on. 

"With markets scaling back their expectations for monetary tightening by the US Federal Reserve, a failure to act by the ECB could put further upward pressure on the euro exchange rate. This, together with our view that eurozone growth will slow further in the coming months, suggests that the ECB will be forced into action," she said. 

After the last meeting, ECB watchers suggested that any sudden announcement of new measures this week would dent the central bank`s credibility. But "will nevertheless surely indicate that the door is still open to further easing in the coming months," said RBS economist Andrew Cates. 

"Market-based inflation expectations are still far too low for comfort and could become even further unhinged should the oil price continue its descent. Downside risks to the growth outlook have obviously increased as well as a result of the recent financial market instability."

Oxford Economics economist Ben May agreed.

"Markets will be looking for signs as to whether the renewed fall in the oil price, ongoing concerns about China and financial market weakness will see the dovish contingent of the governing council regaining the upper hand," he argued.

ING DiBa economist Carsten Brzeski said "the risks for the eurozone have not disappeared." 

"On the contrary, the latest market turmoil, continued concerns about the Chinese economy, adverse effects from low oil prices and recent worries that the US Federal Reserve might have jumped the gun in December have clearly increased the external risks for the eurozone," he said.

In an interview with the financial daily Boersen-Zeitung, the ECB`s former chief economist Otmar Issing suggested the governing council should re-think its timeframe for steering eurozone inflation back up to the central bank`s target of close to but just under 2.0 percent. 

The ECB`s goal is to reach that target "in the medium term."

But "there is a lot to be said for pushing back that time horizon a fair bit," Issing said. 

If the timeframe is too short and a central bank does not achieve its inflation target by then, it could be easily seen as failure, he continued, criticising the communication of central banks in general. 

The ECB`s deputy president Vitor Constancio conceded that mistakes had been made in communicating the bank`s intentions in December.

It was "difficult enough to calibrate monetary policy correctly. But it is even more difficult to fine-tune market expectations. Sometimes our statements are over-interpreted," Constancio said in a newspaper interview at the end of last month.