ECB to weigh new stimulus early next year
European Central Bank (ECB) head Mario Draghi says the bank has "stepped up" preparations for more stimulus, but expects to make a decision only early next year after it assesses the impact of sharply lower oil prices on the struggling economy.
Draghi didn't unveil new stimulus programmes on Thursday after the bank left its benchmark interest rate unchanged at 0.05 per cent. The rate decision was expected as the benchmark is so low it cannot be reduced further.
Rather, Draghi said the ECB will reassess early next year the success of its existing stimulus programmes and the impact of the recent plunge in oil prices on the economy of the 18-country euro bloc. Cheaper energy is likely to help growth in the Eurozone, though it will also tend to weigh on inflation.
If the ECB finds that the economy needs help, it will be ready to offer more help to boost growth and inflation.
ECB staff has "stepped up the technical preparations for further measures, which could, if needed, be implemented in a timely manner," Draghi said.
That's a hint that the bank could pursue large-scale purchases of government bonds, a step which involves pushing newly created money into the economy to raise growth and inflation. The policy, known as quantitative easing, or QE, has been used by the US Federal Reserve, Bank of England and Bank of Japan.
Stock markets turned lower and the euro rose on news that the ECB would wait before considering more stimulus.
Analyst Christian Schulz at Berenberg Bank said he expected the ECB to announce new stimulus in January or March, but that what assets it would purchase remained open: "What exactly the ECB will do remains the open question."
A big programme of government bond buying has run into resistance from some Eurozone members.
German officials in particular worry that purchases of government bonds would reduce incentives for some Eurozone states to reform their economies and could expose taxpayers to losses on the bonds.
The ECB could also buy corporate bonds, but there are fewer of those, making it harder to get the same monetary push for the economy.
Draghi indicated the ECB council would not wait for unanimity among its 24 board members, suggesting that one or two dissenters could not block action. "We don't need unanimity," he said, though he added that new stimulus programmes could be "designed to have consensus".
He used some tough rhetoric to emphasise that the bank would pursue its legal mandate to ensure stable prices: "We have a mandate and we don't tolerate prolonged deviations from our mandate."
And he rejected arguments, sometimes heard from German officials, that buying government bonds violates the legal prohibition against the central bank using its powers to finance governments.
"Do you think we discuss things that are illegal?" he said in response to a journalist's question. Buying government bonds "is an eligible instrument that we could use to pursue our mandate".
"Not to pursue our mandate - that would be illegal."
The ECB is trying to raise dangerously low inflation - a token of weak demand in the economy. It lowered its inflation outlook for next year to 0.7 per cent from a 1.1 per cent forecast made in September.
Falling oil prices cut two ways in Europe. They make the ECB's inflation headache worse by lowering fuel prices. But cheaper fuel also stimulates the economy by putting more cash in consumers' pockets. Draghi said the oil price fall called for "careful assessment".