ECB sees scope for further deposit rate cuts

By Balazs Koranyi

FRANKFURT (Reuters) - The European Central Bank sees scope for further cuts to its deposit rate after the one announced last month as inflation risks missing the ECB's already lowered forecasts, minutes of the bank's December meeting showed on Thursday.

The euro zone economy is at risk from weakening emerging market growth, sagging demand for its exports and increased geopolitical risks, the ECB said in the minutes of a meeting at which it eased policy less than markets expected.

Persistently low oil prices will boost growth but weigh on inflation, which is hovering near zero, the bank added.

The minutes suggest the euro zone central bank's rate-setting Governing Council was keenly aware of risks and chose to disappoint markets with a smaller-than-expected package of measures so it could keep some of its powder dry.

Hoping to boost inflation through increased lending and consumption, the ECB cut its deposit rate to -0.3 percent from -0.2 percent at last month's meeting and extended its asset purchases by six months to March 2017.

It kept the asset buys at 60 billion euros a month ($65.34 billion), however, disappointing some investors who had expected more ambitious steps to counter low oil prices and turmoil in emerging markets including China.

"A cut in the deposit facility rate of 10 basis points was seen as unlikely to trigger material negative side effects and was also seen as having the advantage of leaving some room for further downward adjustments, should the need arise," the minutes said.

"The risks surrounding the outlook for HICP inflation were also assessed, on the balance, to remain on the downside."

The bank warned that a bigger rate cut could trigger negative side effects over time, however, adding that the experiences of other countries with even lower rates had limited relevance given their small size within the global economy.

ECB rate-setters also agreed it was time for governments to take action because monetary policy could only provide a limited boost to growth and inflation, and that member states and the EU executive should finally come up with policies to foster growth.

"A call was made to remind governments forcefully about their responsibility to contribute decisively to rebalancing the euro area economy," the minutes said.

Highlighting a rare public rift, the bank said not all Council members agreed with its decision, with some proposing more action and others less.

Some rate setters proposed a bigger, perhaps 20 basis point rate cut, while keeping the bank's asset purchase program unchanged. Others wanted even more accommodation, with some suggesting an increase in the monthly spend and an even longer extension of the program.

The euro firmed and euro zone bond yields rose after the decision, with the currency hanging onto its gains even after the U.S. Federal Reserve hiked rates later that month. The Fed's first rate increase for nearly a decade confirmed expectations that the world's top two central banks would be moving in opposite directions for the foreseeable future.

Oil prices have fallen by around 20 percent since the December meeting and long-term inflation expectations have sunk lower, indicating that the ECB may have to ease policy further.

But even if the bank is forced to act again, many policymakers appear wary of moving soon and would prefer to give their previous measures more time to take effect.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa and Catherine Evans)

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