Fri | Nov 27, 2020

European Central Bank paves way for stimulus

Published:Friday | July 26, 2019 | 12:45 AM
The European Central Bank in Frankfurt, Germany.
The European Central Bank in Frankfurt, Germany.

The European Central Bank, ECB, joined the US Federal Reserve in making clear that more stimulus could be coming soon to support an economy weakening in the face of global trade tensions.

The ECB’s rate-setting board left its key interest benchmarks unchanged at a policy meeting Thursday, but said it could cut them as its next move. It also said it was telling staff to study ways to restart its bond-buying stimulus programme in the coming weeks.

Several analysts said the statements meant the ECB, which sets interest rate benchmarks for the 19 countries that use the euro, could deliver a stimulus package at its next meeting on September 12.

President Mario Draghi stressed repeatedly at his news conference that the bank was “determined to act”.

“We say, we don’t like the ­current inflation,” he said. “No question of accepting the inflation we are seeing today.”

Inflation in the Eurozone is at an annual 1.3 per cent, short of the ECB’s goal of just under two per cent that is considered healthiest for the economy, even after years of low interest rates and massive amounts of monetary stimulus.

And global economic growth is being dragged down by events like the United States-China trade war that have spurred other central banks, including the Fed, to also move towards providing more stimulus.

Officials at the Fed have ­signalled that they could cut their interest rate benchmark from a range of 2.25-2.5 per cent at their July 30-31 meeting. Central banks in South Korea, Indonesia and South Africa have already cut rates in recent days.

The United States and China have imposed import taxes on hundreds of billions of ­dollars worth of traded goods. American President Donald Trump has warned that more tariffs could be coming if he cannot reach a trade deal with China to reduce the US trade deficit. Trump has also threatened to put tariffs on Europe’s big automotive industry.

Meanwhile, Britain’s exit from the European Union on October 31 could result in tariffs on trade if the country does not reach a withdrawal deal with the rest of the bloc.

These combined uncertainties have mainly hurt the ­manufacturing sector in Europe, particularly in export-focused countries like Germany, where the labour market is otherwise strong.

The European Central Bank’s key move on Thursday was to change the wording of its policy statement by saying that rates will remain at current record lows “or lower” through the ­middle of 2020. Adding “or lower” ­emphasised that the next move could be down.

The monetary authority for the 19 countries that use the euro, meanwhile, began looking into a possible new round of bond purchases, which inject newly created money into the economy in the hope of stimulating economic ­activity and raising inflation.

The central bank halted a €2.6-trillion bond-buying programme only at the end of last year, saying inflation was headed sustainably towards its goal. The inflation figure is important ­because the ECB is tasked above all with keeping price increases steady. Price and growth ­indicators have weakened in recent months, however. Persistently low inflation can be a sign of economic weakness and can make it harder for indebted governments and consumers to reduce their debt burden.

It remains an open question about how much more stimulus the ECB would get from a rate cut or bond purchases, since rates are already low and the €2.6 billion in added stimulus has not been withdrawn from the financial system. Almost four years of bond purchases left the ECB still struggling to consistently reach the inflation target.

Draghi said that the past bond purchases have created millions of jobs, but that wage gains were taking longer than expected to translate to higher consumer prices.

Central bank policies have a wide-ranging impact on ­companies, governments and ­individuals. A return to more ­stimulus means cheaper ­borrowing for companies and governments, which can ­support business activity and take ­pressure off government ­budgets. It can mean paltry ­returns, ­however, for savers while boosting stock prices, at least in the short turn, by pushing ­people out of ­lower-yielding, safer ­investments into riskier ones.

AP