Wed | Aug 16, 2017

European Central Bank adds more stimulus

Published:Friday | December 9, 2016 | 12:00 AM
The European Central Bank

The European Central Bank (ECB) is adding half a trillion euros (US$579 billion) in stimulus to the Eurozone economy to support growth as Europe heads into what could be a tumultuous election year.

The bank's 25-member governing council startled markets Thursday by reducing the monthly amount of its bond purchases by which it performs the stimulus but extending them for six months instead of nine.

ECB President Mario Draghi said the reduction did not mean the bank was tapering, or phasing out, the stimulus.

The chief monetary authority for the 19 countries that use the euro said the bond purchases would continue at least through December, past the previous earliest end date of March.

After March, it will reduce the amount of bonds it buys to €60 billion (US$64 billion) a month from

€80 billion. That effectively adds at least euro540 billion in stimulus to the existing €1.74-billion (US$1.87-trillion) effort.

Draghi said the central bank could increase the monthly purchases if needed and that there is still no firm end date for the stimulus programme. He said it meant "a more lasting transmission of our monetary stimulus," not a reduction in support.

The euro fell in international markets, declining 0.9 per cent against the dollar to US$1.0655. More stimulus like bond-buying, tends to weigh on a currency.

Economist Carsten Brzeski at ING-DiBa said the ECB risked sending the impression it was focused on reducing the rate of stimulus rather than increasing it.

"It is the combination of extending and tapering that we thought would not yet happen, as it could risk an unwarranted increase in bond yields," said Brzeski. "Even without calling this tapering, the ECB just announced tapering."

The bond purchases pump freshly created money into the banking system in hopes of increasing weak inflation and boosting growth. The flood of cash also helps keep financial markets calmer as Europe faces elections in the Netherlands and France next year, where anti-EU, populist candidates are expected to do well.

By adding stimulus, the ECB is moving in the opposite direction to that of the United States Federal Reserve. The US central bank is contemplating another interest rate increase at its December 13-14 meeting.

Beyond the stimulus programme, the ECB kept its key interest rate benchmarks unchanged. It left at zero its refinancing rate, at which it lends money to commercial banks, and minus 0.4 per cent on deposits it takes from banks.

Draghi had made clear in recent days that the bank was not seeing a convincing upturn in inflation. It aims for two per cent annual inflation, considered best for growth and jobs, and right now inflation is only 0.6 per cent annually. That's better than the falling prices seen earlier this year, but still well below target.

Worse, core inflation, which includes volatile fuel and food, remained stuck at 0.8 per cent in November lower than the 0.9 per cent reading from a year ago. Meanwhile, economic growth is only modest at 0.3 per cent in the third quarter.

- AP