What to look out for from the European Central Bank meeting

AP News
Posted: Sep 07, 2016 4:07 AM
What to look out for from the European Central Bank meeting

FRANKFURT, Germany (AP) — Should the European Central Bank give another push to an economy that's not rolling fast enough to raise excessively low inflation?

That's the question facing the bank's 25-member governing council when it meets Thursday at its skyscraper headquarters in Frankfurt, Germany.

The council, headed by President Mario Draghi, decides on interest rate benchmarks and other monetary policy steps for the 19 countries that use the euro currency.

Here's a quick guide to what might happen Thursday, and why.



Some analysts say the ECB may increase its stimulus efforts because of uncertainty over Britain's June 23 voted to leave the European Union and its tariff-free trade zone. So far, economic data doesn't show much damage to the eurozone. Of more concern is the longer-term impact. A new trade deal could take years to negotiate and could take years to sort out, leaving businesses unable to plan effectively and hurting trade.

And inflation is resisting the bank's efforts to push it up.

Inflation is only 0.2 percent annually, far short of the ECB's aim of just under 2 percent. Even when volatile items like food and oil prices are excluded, inflation was a weak 0.8 percent in of August. Unemployment, on the other hand, is at a painful 10.1 percent.

"It currently looks like a very close call as to whether the ECB takes any further stimulative action at its Sept. 8 policy meeting," wrote Howard Archer, chief European and U.K. economist for IHS Global Insight.



Others argue things aren't really that bad. The eurozone has been growing at about a 1.6 percent annual rate for the past six quarters, notes economist Holger Schmieding at Berenberg Bank. That's not great, but not a disaster, either.

And the central bank alone may not be able to do much to improve growth anyway, Schmieding said.

More monetary stimulus won't raise the level of potential growth in the absence of economic reforms by governments, he argued. Draghi and other ECB officials have argued that governments must do more to reduce barriers to doing business, such as burdensome paperwork and rules that make it harder to start a business, and invest more in public infrastructure — roads, bridges, ports, for example.

Schmieding said there was "no compelling need to act now."

"Short of major pro-growth structural reforms, 1.6 percent seems to be the underlying trend for the time being," he said.



If the ECB does act, one of the more likely steps would be to extend its current 80 billion euros ($90 billion) per month in bond purchases from banks and other financial institutions. Such purchases pump newly created money into the banking system. The ECB has already bought over 1 trillion euros worth, on its way to an expected 1.74 trillion euros.

Pumping money into the economy can help raise inflation, though results have so far been modest. The ECB has also cut its benchmark rate to zero, and the rate on deposits it takes from commercial banks to minus 0.4 percent. The negative rate aims to push banks to lend excess cash, not hoard it.

The bond purchases are set to continue at least through March 2017, or until inflation turns up. The ECB could say Thursday that the purchases will definitely run for longer.

It could also expand the categories of bonds it can buy, relieving fears that it might run out of assets to buy. If it feels pressed, the ECB could drop its self-imposed ban on buying bonds yielding less than its bank deposit rate of minus 0.4 percent. Since there are government bonds yielding less than that, such a step would expand the universe of bonds the ECB could buy.



Investors will keep a close eye on the ECB staff's new economic projections, to be published Thursday. Any reduction in forecasts for inflation makes more stimulus likely, if not this week then in coming months.

The bank's goal over time is to achieve inflation of just under 2 percent, the level the bank says is most consistent with a strong economy.

In June, the staff estimates were for 1.3 percent inflation next year and 1.6 percent in 2018.

Trimming those numbers Thursday would, in effect, be saying that the bank's goal is slipping farther away, an argument in favor of loosening monetary policy even further.