Euro­pean Cen­tral Bank ready for new stim­u­lus?

The Pak Banker - - OPINION - Jack Ewing

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.

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