Draghi: ECB looking at new tools for growth

AP News
Posted: Apr 04, 2013 12:57 PM
Draghi: ECB looking at new tools for growth

FRANKFURT, Germany (AP) — With the economy shrinking and unemployment rising, the head of the European Central Bank said more aggressive steps may be on the way to stimulate growth in the euro region.

ECB President Mario Draghi said Thursday the bank was considering a range of actions to boost lending to companies and reinvigorate the ailing euro area economy, which has been in recession for a little over a year.

Draghi said the ECB had an "extensive" conversation at its monthly policy meeting about lowering its benchmark interest rate and other ways of jump-starting the region's economy. The eurozone has been weighed down by towering government debt and austerity measures aimed at fixing the problem.

The ECB decided to leave its benchmark interest rate unchanged at 0.75 percent, where it has stood since July 2012.

Analysts took Draghi's remarks, made at the ECB's monthly news conference in Frankfurt, Germany, as sign that the bank had moved closer to another rate cut or other stimulus measures.

Draghi's remarks were "a strong hint they could act very soon," said Christian Schulz at Berenberg Bank in London.

The ECB head was expanding on comments made last month, when he said the bank was "actively reflecting" on new nonstandard measures but made. This time he said the bank was now "looking at various instruments, various tools."

Draghi didn't say what the ECB is considering to kick-start the economy of the 17 European Union countries that use the euro. Analysts say, however, the bank is mostly likely looking at ways to encourage lending to midsize companies so they can expand and hire.

One way to encourage such lending would be to allow banks to bundle the small business loans they make into securities, which they could use as collateral to get cash loans from the ECB — money they could then lend again.

Another possibility could be allowing banks to have ECB credit for periods longer than the current 3-month maximum — as the bank has already done several times. In late 2011, and again in early 2012, the ECB issued just over 1 trillion euros in low-interest, three-year loans to banks. The measure did help stabilize the eurozone's banks but did not stimulate much new lending to companies.

Draghi said any new approach "wasn't an obvious action" and that the bank was "thinking 360 degrees" on new tactics.

The eurozone is stuck in recession and the ECB says it will shrink 0.5 percent this year, though it predicts a gradual recovery later in 2013.

The ECB president stuck to that recovery forecast, but said it was "subject to downside risk." Weak economic indicators suggest that the currency union's economy shrank in the first quarter for the sixth quarter in a row.

"We will assess all incoming data and we stand ready to act," Draghi said.

The ECB would consider the experience of other countries but do what was best-suited to Europe's institutions, Draghi added. His remarks came hours after the Bank of Japan announced a massive expansion of its efforts to increase the supply of money in the economy.

The Bank of Japan, Bank of England and the U.S. Federal Reserve have all bought bonds as a way of pumping new money into the economies. This technique, called quantitative easing, can boost growth at the risk of inflation down the road.

Instead, the ECB has focused on how to transmit its low rates throughout the eurozone. The problem is that banks in countries with troubled financial system are not passing on these rates to customers and companies.

In the eurozone, 80 percent of company financing comes from banks — as opposed to selling bonds, the more common source of financing in the U.S.

"Good availability of credit at affordable cost is essential to the eurozone economy," said Marie Diron, senior economic adviser to Ernst & Young.

Analysts say it would be hard for the ECB to follow other central banks and do quantitative easing through bond purchases. Such a move would likely face resistance from the eurozone's largest economy, Germany, which has a strong aversion to measures that might risk inflation or excessively support government finances. It would also raise the difficult question of which country's bonds to buy — an issue faced only by the ECB as a multinational central bank.