European Central Bank ready for new stimulus?
THE European Central Bank's president, Mario Draghi, issued a stronger-than-expected signal on Thursday that his policy team could step up its stimulus program as early as March in response to stubbornly low inflation and turbulence in the financial markets.
"Conditions have worsened" since the central bank's Governing Council met in December, Mr. Draghi said at a news conference after the central bank announced that it would leave key interest rates unchanged. He indicated that the Governing Council had been surprised by the extent of recent market turmoil as well as by plummeting oil prices, which are a factor in the eurozone's dangerously low inflation. Mr. Draghi and the council would meet again on March 10. Mr. Draghi emphasized on Thursday that the European Central Bank was poised to take further actions in the future if necessary. "There are no
Buoyed by the hope of more monetary policy intervention sooner than most analysts had expected, investors drove up eurozone stocks even as Mr. Draghi was still speaking. And the euro headed lower against the dollar - a potential positive sign for the eurozone, whose exports could become cheaper on the global market as a result. The central bank left its benchmark rate at 0.05 percent on Thursday, already a record low. The rate on deposits held at the central bank remained at negative 0.3 percent, a penalty rate intended to encourage banks to lend main metric - any closer to the official target of just below 2 percent. That is the level the central bank has designated as most conducive to growth without overheating the economy. For the eurozone, sustaining meaningful economic growth has been hard to achieve in recent years. And inflation has remained so low that at times the bigger concern has been that the economy might slip into a downward, deflationary spiral.
More recently, the eurozone has been buffeted by the worldwide stock sell-off prompted by uncertainty in China, worries about global growth and plunging oil prices. The main stock indexes in France, Germany, Italy and Spain have all fallen 10 percent or more over the past month. Mr. Draghi expressed concern about data indicating that investors are pulling money out of China in response to market turbulence there. But he added: "The Chinese authorities have a reputation for acting responsibly. What they have done in the last few weeks shows that they are gaining control over their policy making."
Mr. Draghi said on Thursday that the central bank's decision at itsDecember meeting to extend its stimulus program - monthly purchases of government bonds and other assets - by an additional six months was "fully appropriate." The bank also changed a crucial interest rate at that same meeting. But he said that conditions had changed significantly since then. "The Governing Council is open to using all the necessary instruments to cope with a situation that is materially different than the beginning of December," he said.
Inflation in the eurozone has been hovering near zero since late 2014, and it was 0.2 percent in December. Such low inflation makes central bankers and economists nervous because it is dangerously close to deflation, a self-reinforcing downward price spiral that is poisonous to growth and job creation.
Slumping oil prices, which the European Central Bank cannot control, are a big reason for the low inflation. Slow economic growth and 10.5 percent unemployment in the eurozone are also factors, because they make it hard for companies to raise prices. Mr. Draghi noted at the news conference that plunging oil prices alone would not necessarily be something the central bank would worry about, as they could also be a stimulus for the economy in helping businesses and households that consume energy. The problem, he said, is when low oil prices feed into a bigger downward price spiral.
"We've got to be very vigilant about that," he said. "We don't have many reasons to be optimistic about that." In December, the central bank said it would extend its purchases of eurozone government bonds and other assets through March 2017. The asset purchases, at a rate of 60 billion euros a month, or about $65.3 billion, are a way of pumping money into the financial system and trying to stimulate inflation.