FRANKFURT Many European Central Bank policy makers are sceptical about the need for further policy action in the near term, conversations with five of them indicate, even as inflation expectations sink and some investors bank on more easing.
Next week's rate meeting is expected to be relatively uneventful with the big test coming when the ECB releases its initial 2018 growth and inflation forecasts on March 10.
But even were these to decline, some of the central bankers who spoke to Reuters said the ECB should not respond immediately.
"We all hope ... that what we've done is enough," said a swing member of the Governing Council. "Given the oil price volatility, even if the 2018 forecast is below target, we don't have to act."
"The ECB has done its job, created the space with exceptional accommodation. Now it's time for others to do their job: fiscal policy, infrastructure investments, structural reforms," said the rate setter, who runs a national central bank, and asked not to be named.
ECB President Mario Draghi disappointed markets with a smaller-than-expected package of measures in December, leaving some investors holding out hope he could take further steps as soon as March when the ECB reveals fresh economic forecasts.
Those investors anticipate pressure to act from a further deterioration in inflation, keeping the ECB well off course from reaching its goal of keeping prices ticking up by almost 2 percent annually.
Indeed, the 20 percent fall in oil prices since its December meeting alone would be enough to sink the ECB's inflation forecast with China, adding to the uncertainty.
But ECB rate setters who spoke to Reuters remain wary about taking further action in the coming months, even if that requires them to temporarily turn a blind eye to the impact of falling oil prices or the fact that inflation has been below the ECB's target for three years.
Even if some concede that more action will be needed at some point, they are keen to dampen market hopes, avoiding another disappointment after expectations soared too high in December, sending markets into a frenzy when the ECB disappointed.
"I think it's clear that more ECB action will have to come. But it's going to depend on the impact of the measures already taken and won't come very soon," said a dovish member of the ECB's Governing Council, who asked not to be named. "Monetary policy is not credible if you change it every month. I think that in March we'll only start discussing what measures and when we still need to take," said the policy maker, who heads one of the euro zone's 19 national central banks.
The ECB cut its deposit rate deeper into negative territory in December and extended its assets purchases by six months, hoping that more money printing would spur lending, economic activity and inflation.
Vice President Vitor Constancio, who has supported earlier policy loosening, recently said he preferred no change in the "foreseeable future".
Although economic growth is improving while employment and lending steadily rise, inflation expectations are weakening, a dilemma for the bank.
Vitas Vasiliauskas who heads Lithuania's central bank noted that cheap oil has its benefits so the ECB should shift its focus on core inflation, which strips out volatile food and energy prices.
His comments could be read as urging the ECB not to act as ‘core’ inflation has been performing relatively well. "The low oil price helps the real economy," he said. "I think monetary policy should rather concentrate on core inflation." The ECB has looked past some oil price volatility in the past, arguing that monetary policy cannot counter such a shock but the impact of oil prices is being factored into the euro zone’s long-term outlook. Indeed, the euro zone five-year, five-year breakeven forward rate, a key gauge of long-term inflation expectations, has been falling sharply since early December, standing at 1.62 percent, indicating waning confidence in the ECB's ability to boost inflation.
If this drifts too far off course, faith in Draghi’s ability to lift the economy could fade, raising pressure to act. Deflation, one of the ECB's big fears, can suck an economy ever deeper into recession if consumers postpone buying in the hope that goods will be cheaper in the future. The knock-on effect of such behaviour can slowly strangle companies and is very difficult to reverse once it has taken hold. Still, Josef Bonnici, who sits on the Governing Council, cautioned the oil price fall had negative as well as positive effects, such as boosting the purchasing power households. Such reluctance to take further action may mean that the disappointment seen in December may not be the last, despite efforts to temper expectations.
(Additional reporting by Francesco Canepa Editing by Jeremy Gaunt.)