Sat, Feb 08, 2014 - Page 15 News List

European Central Bank may offer further stimulus

Bloomberg

European Central Bank President Mario Draghi, right, and European Central Bank Vice President Vitor Constancio arrive for a news conference at the bank’s headquarters in Frankfurt, Germany, on Thursday.

Photo: Bloomberg

European Central Bank (ECB) President Mario Draghi has put investors on a month’s notice for further economic stimulus after outlining the ingredients necessary for action.

He cited next week’s snapshot of eurozone economic growth and the need to better assess the inflation outlook as critical for whether policy makers take “decisive” steps when they reconvene to set monetary policy next month.

He spoke to reporters on Thursday after the Frankfurt-based central bank left its benchmark interest rate at a record-low 0.25 percent.

The bank is setting up a month of data scrutiny as officials weigh up whether deteriorating price pressures are sufficient to merit fresh aid, or a stabilization in money markets and signs of an economic pickup mean the current ultra-loose monetary stance is working. This month’s policy pause was enough to prompt the euro’s biggest gain in two weeks.

“The ECB continues to look at all policy options, but does not seem to have decided on a particular course of action yet,” said Elga Bartsch, chief European economist at Morgan Stanley, who predicts a rate cut next month.

Waiting a month also allows breathing space to assess the selloff in emerging-market currencies and for the ECB to compile its latest macro-economic forecasts. Draghi said that officials will for the first time look ahead two years by providing inflation and growth estimates for 2016.

“It is not too hard to imagine that the key reason for delay was the decision to wait for one month to think some more about the inflation outlook in 2016 before taking a decision, or perhaps to make sure that the decision is consistent with that outlook,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group PLC, who predicted the ECB would cut rates on Thursday.

The central bank held fire even after a month which saw an unexpected slowdown in eurozone inflation and a slump in the emerging markets that have bolstered the region’s exports. Consumer prices rose 0.7 percent last month from a year earlier, less than half the ECB’s goal of just below 2 percent. Draghi rebutted speculation the economy faces deflation, while reiterating his expectation for a prolonged period of subdued price pressures.

At the same time, swings in interbank borrowing costs have eased and gauges of eurozone manufacturing and German business confidence are at the highest levels in two-and-a-half years, signaling that the economy is strengthening almost a year after it exited recession.

“We are willing and we are ready to act,” Draghi said on Thursday, citing “the need to get more information” as a reason for maintaining the “status quo.”

Acknowledging a broad discussion over what to do next, Draghi indicated that ending the absorption of crisis-era bond purchases was one option. Other possibilities include issuing fresh long-term loans to the region’s banks.

The most likely outcome when officials meet again on March 6 is a rate cut, said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. Less convinced was David Mackie, chief European economist at JPMorgan Chase & Co, who predicted the ECB will stand pat.

“Rate cuts will only come if spot inflation moves lower or if growth falters,” he said. “The central bank appears prepared to be patient.”

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