European Central Bank ready to give eurozone more stimulus

AP News
Posted: Sep 03, 2015 12:57 PM
European Central Bank ready to give eurozone more stimulus

FRANKFURT, Germany (AP) — The European Central Bank is ready to give the eurozone economy a bigger dose of stimulus if turmoil in China and weaker global growth hurt its modest recovery, President Mario Draghi said Thursday.

Market volatility, concern over a looming U.S. interest rate increase and a drop in oil prices have spawned uncertainty over the global economy, leading the ECB to cut its inflation and growth forecasts for the eurozone.

Draghi said the ECB can add to its 1.1 trillion euro ($1.2 trillion) program, if the 19-country currency bloc needs it.

"We expect the economic recovery to continue, albeit at a somewhat weaker pace than earlier expected, reflecting in particular the slowdown in emerging market economies, which is weighing on global growth and foreign demand for euro area exports," Draghi said.

He cautioned it was premature to conclude that the market turmoil of recent weeks means longer-term trouble for the world economy. Draghi said that before acting, the ECB wanted to learn "whether this is just the beginning of long-term lower output, or a strictly transitory phenomenon."

The ECB is pumping 60 billion euros a month in newly printed money into the eurozone economy by buying government and corporate bonds. The program, dubbed quantitative easing, or QE, is slated to run at least through September 2016.

Draghi said the bank could increase the "size, composition and duration of the program."

Tom Rogers, senior economic adviser to the EY Eurozone forecast, said that the ECB's cuts to its forecasts "imply that QE will go on longer than the current end-point."

Joerg Kraemer, chief economist at Commerzbank, said the ECB would likely increase the size of the stimulus program at its December meeting, and predicted it would do so by raising the amount of monthly bond purchases rather than by extending the program's duration.

A skeptic of such bond-buying programs, Kraemer argued that more stimulus would not help, saying it would only support financial markets, while taking pressure off of eurozone governments to reform their economies.

The stimulus is intended to help get consumer price inflation back toward the ECB's target of just below 2 percent. In the year to August, inflation stood at just 0.2 percent. Draghi said the rate could even go negative in coming months due to a further drop in oil prices this summer.

The hint at further stimulus boosted stock markets but weighed on the euro, whose value would be diluted if more money is put in circulation. The euro fell 1 percent to $1.1118, while the Stoxx 50 index of leading European shares added to earlier gains, rising 2.2 percent.

The ECB's position contrasts with that of the U.S. Federal Reserve, which is expected to raise interest rates as early as September.

Such a move could cause more turmoil in global markets as investors bring money back to the U.S. from other countries to take advantage of the new, higher interest rate. The move could also indirectly lead to higher market interest rates in Europe, hurting the economy by making borrowing more expensive.

Draghi said he usually doesn't comment on other central banks but added that "if this is necessary to achieve the inflation objectives and more broadly the objectives of the Federal Reserve monetary policy, this is a plus for the world."

On the positive side for the eurozone, a Fed rate increase could also strengthen the dollar against the euro, boosting the eurozone's trade position.

Against the backdrop of weaker oil prices and a slowdown in developing economies, the ECB cut its projections for eurozone inflation and economic growth.

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It trimmed its annual inflation forecast for this year to 0.1 percent from 0.3 percent previously, and for next year to 1.1 percent from 1.5 percent. It cut its eurozone growth forecast to 1.4 percent this year from 1.5 percent previously, and to 1.7 percent for next year from 1.9 percent.

The ECB also tweaked the stimulus program to make more government bonds available to purchase and ensure it can be fully carried out. The bank did that by saying it would raise the limit on purchasing bonds issued by any one country to 33 percent from 25 percent in some cases.

For now, the eurozone economic recovery appears to be holding up despite uncertainty over China and as worries over Greece eased during the summer.

Financial information company Markit said it monthly purchasing managers' index - a gauge of economic activity - rose to a four-year high of 54.3 points in August from 53.9 the previous month. Anything above 50 indicates expansion.

Separately, official figures showed retail sales across the eurozone rose by a solid 0.4 percent in July from the month before. The increase was in line with market expectations and more than made up for the 0.2 percent decline in June.

Consumer confidence appeared to be particularly buoyant in Germany, Europe's biggest economy, where retail sales spiked by 1.4 percent during the month. There were no figures available for Greece, which has been struggling with controls on money flows, such as limits on daily withdrawals at ATMs, since the end of June.


Pylas contributed from London.