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Europe’s Central Bank, Defying Doomsayers, Holds Rate Steady Europe’s Central Bank, Defying Doomsayers, Holds Rate Steady
(7 months later)
PARIS — The European Central Bank’s president, Mario Draghi, is taking a wait-and-see approach as the threat of deflation hangs over the euro zone and the region’s unemployment remains stubbornly high. PARIS — The European Central Bank’s president, Mario Draghi, is taking a wait-and-see approach as the threat of deflation hangs over the euro zone and the region’s unemployment remains stubbornly high.
Despite mounting pressure to take action, the central bank on Thursday kept the benchmark interest rate unchanged for a third straight month, at a record low of 0.25 percent. Mr. Draghi said that the central bank needed more data before any additional moves to spur the economy could be justified, and that it would make a reassessment next month.Despite mounting pressure to take action, the central bank on Thursday kept the benchmark interest rate unchanged for a third straight month, at a record low of 0.25 percent. Mr. Draghi said that the central bank needed more data before any additional moves to spur the economy could be justified, and that it would make a reassessment next month.
Economists have been increasingly worried that Europe may be nearing the sort of economic sinkhole that has gripped Japan for much of the last two decades. The inflation rate has been below 1 percent in every month since October. The fear is that such low consumer prices will slip into actual deflation, in which falling prices signal an economy so sluggish that businesses and consumers see little reason to invest and spend.Economists have been increasingly worried that Europe may be nearing the sort of economic sinkhole that has gripped Japan for much of the last two decades. The inflation rate has been below 1 percent in every month since October. The fear is that such low consumer prices will slip into actual deflation, in which falling prices signal an economy so sluggish that businesses and consumers see little reason to invest and spend.
“To say that the E.C.B. has fallen behind the curve would be a gross understatement,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, wrote in a research note. “The credibility of the E.C.B.’s monetary policy, at a time when the euro zone’s economic recovery is still dangerously fragile, is being severely undermined.”“To say that the E.C.B. has fallen behind the curve would be a gross understatement,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, wrote in a research note. “The credibility of the E.C.B.’s monetary policy, at a time when the euro zone’s economic recovery is still dangerously fragile, is being severely undermined.”
Mr. Draghi seemed to go to great lengths to challenge the doomsayers. The euro zone is currently “experiencing a prolonged period of low inflation,” Mr. Draghi acknowledged at a news conference Thursday in Frankfurt. At a later point he said: “We have to dispense with the question, Is there deflation? The answer is no.”Mr. Draghi seemed to go to great lengths to challenge the doomsayers. The euro zone is currently “experiencing a prolonged period of low inflation,” Mr. Draghi acknowledged at a news conference Thursday in Frankfurt. At a later point he said: “We have to dispense with the question, Is there deflation? The answer is no.”
Financial markets took the central bank’s decision in stride, with stocks broadly higher in Europe and on Wall Street, and the euro gaining ground against the dollar.Financial markets took the central bank’s decision in stride, with stocks broadly higher in Europe and on Wall Street, and the euro gaining ground against the dollar.
Economists say it is likely that the European Central Bank will have to act next month, given the weak economic environment.Economists say it is likely that the European Central Bank will have to act next month, given the weak economic environment.
With more than 19 million people officially listed as unemployed in the euro zone, falling prices would be another weight on the labor market, corporate profits and growth. And because falling prices put stress on borrowers — leading some to default on their loans because their houses or other assets are worth less than what they paid for them — it could further weaken Europe’s still-fragile banking system.With more than 19 million people officially listed as unemployed in the euro zone, falling prices would be another weight on the labor market, corporate profits and growth. And because falling prices put stress on borrowers — leading some to default on their loans because their houses or other assets are worth less than what they paid for them — it could further weaken Europe’s still-fragile banking system.
Economists have warned that urgent near-term action is needed since deflation is so hard to fight once it is entrenched. Some are calling for a Federal Reserve-style “quantitative easing” campaign, in which the central bank would begin a major bond-buying program to flood the market with liquidity meant to buoy prices.Economists have warned that urgent near-term action is needed since deflation is so hard to fight once it is entrenched. Some are calling for a Federal Reserve-style “quantitative easing” campaign, in which the central bank would begin a major bond-buying program to flood the market with liquidity meant to buoy prices.
Mr. Draghi did repeat that the central bank was “ready and willing” to use all the means at its disposal to fight deflation if it became a problem, and he did not rule out some form of quantitative easing. He also said the bank had studied the possibility of increasing the money supply by not offsetting the purchase of bonds it bought from 2010 to 2012. But all in all, he seemed to be saying that while the bank had a big stick at its disposal, it was not ready to use it.Mr. Draghi did repeat that the central bank was “ready and willing” to use all the means at its disposal to fight deflation if it became a problem, and he did not rule out some form of quantitative easing. He also said the bank had studied the possibility of increasing the money supply by not offsetting the purchase of bonds it bought from 2010 to 2012. But all in all, he seemed to be saying that while the bank had a big stick at its disposal, it was not ready to use it.
The euro’s gain against the dollar after the European Central Bank’s announcement underscored another nagging problem for the region. While some see a strong euro as a sign of confidence after the upheaval of the sovereign debt crisis, it is a hindrance in a period of ultralow inflation.The euro’s gain against the dollar after the European Central Bank’s announcement underscored another nagging problem for the region. While some see a strong euro as a sign of confidence after the upheaval of the sovereign debt crisis, it is a hindrance in a period of ultralow inflation.
European officials and companies would welcome a decline in the euro’s value. It would help alleviate many of the central bank’s deflation concerns — because the prices of imported goods would rise — and it could contribute to the economic recovery by making the prices of European exports more competitive in overseas markets.European officials and companies would welcome a decline in the euro’s value. It would help alleviate many of the central bank’s deflation concerns — because the prices of imported goods would rise — and it could contribute to the economic recovery by making the prices of European exports more competitive in overseas markets.
On Thursday, the European Central Bank also left unchanged the deposit rate it pays commercial banks on money that they keep at the central bank. That rate remains at zero.On Thursday, the European Central Bank also left unchanged the deposit rate it pays commercial banks on money that they keep at the central bank. That rate remains at zero.
There had been speculation by some economists and analysts that the central bank might actually reduce the deposit rate to a negative number, essentially forcing banks to pay the central bank to keep their money. This could encourage banks to lend more to businesses and consumers, rather than parking their funds with the central bank.There had been speculation by some economists and analysts that the central bank might actually reduce the deposit rate to a negative number, essentially forcing banks to pay the central bank to keep their money. This could encourage banks to lend more to businesses and consumers, rather than parking their funds with the central bank.
Mr. Draghi “is trying to get a grip on market expectations,” said Carsten Brzeski, an economist at ING Group in Brussels.Mr. Draghi “is trying to get a grip on market expectations,” said Carsten Brzeski, an economist at ING Group in Brussels.
The Governing Council, which sets the bank’s monetary policy, “is really not feeling comfortable with further nonstandard measures,” Mr. Brzeski said. “These things are controversial, especially in Germany, and they’re hard to implement in practice.”The Governing Council, which sets the bank’s monetary policy, “is really not feeling comfortable with further nonstandard measures,” Mr. Brzeski said. “These things are controversial, especially in Germany, and they’re hard to implement in practice.”
“On top of that,” Mr. Brzeski added, “it isn’t clear that these things would work. The E.C.B. is already giving banks unlimited access to funds at 0.25 percent interest, so what else can they really do to encourage lending? They don’t have a silver bullet.”“On top of that,” Mr. Brzeski added, “it isn’t clear that these things would work. The E.C.B. is already giving banks unlimited access to funds at 0.25 percent interest, so what else can they really do to encourage lending? They don’t have a silver bullet.”
He said the central bank would have a number of new economic reports to work with by its next meeting, on March 6, including data on February inflation; the euro zone’s fourth-quarter gross domestic product; and the European Central Bank’s own new projections.He said the central bank would have a number of new economic reports to work with by its next meeting, on March 6, including data on February inflation; the euro zone’s fourth-quarter gross domestic product; and the European Central Bank’s own new projections.
There are reasons for optimism about the euro zone’s economy, which the central bank estimates will expand 1.1 percent this year. Readings of consumer and business sentiment have been strong, and purchasing manager surveys have indicated that output is at the highest levels in more than two years.There are reasons for optimism about the euro zone’s economy, which the central bank estimates will expand 1.1 percent this year. Readings of consumer and business sentiment have been strong, and purchasing manager surveys have indicated that output is at the highest levels in more than two years.
“If the trends continue as presently,” Mr. Brzeski said, “the E.C.B. won’t do anything in March, either. But if something changes dramatically, then they’re going to act.”“If the trends continue as presently,” Mr. Brzeski said, “the E.C.B. won’t do anything in March, either. But if something changes dramatically, then they’re going to act.”