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European Central Bank Leaves Benchmark Rate Unchanged European Central Bank Says Stimulus Is Likely, but Not Before June
(35 minutes later)
FRANKFURT — The European Central Bank left its benchmark interest rate unchanged on Thursday, once again defying criticism that it is doing too little to counteract very low inflation that some economists see as a grave threat to the euro zone economy. FRANKFURT — The European Central Bank on Thursday held interest rates steady, but signaled that it is likely to take action next month to stimulate the euro zone economy, amid growing concern about economic fallout from tension in Ukraine.
The central bankers, meeting in Brussels, left the main rate at 0.25 percent, a record low. While many economists have called for more decisive action to stimulate the euro zone economy, members of the bank’s governing council appear reluctant to deploy the more radical measures that would be required to do so. Mario Draghi, the president of the central bank, said Europe would suffer from effects such as a decline in the Russian economy, stiffer economic sanctions, or higher gas prices.
The bank’s president, Mario Draghi, said at a news conference that the E.C.B. continued to monitor the economy and the inflation rate. He indicated that the central bank was ready to take action at its next meeting, in June, although members of the governing council would first want to see the latest economic projections by the central bank’s staff. “It’s a very complex geopolitical picture which could evolve,” Mr. Draghi said at a news conference in Brussels. “If it does evolve, the euro zone and European Union are going to be impacted more than other parts of the world.”
Although the central bank left its benchmark interest rate unchanged, Mr. Draghi said there was agreement among members of the governing council, which sets monetary policy, that something should be done to counteract very low inflation, which some economists see as a grave threat to the euro zone economy.
“There is consensus about being dissatisfied with the projected path of inflation,” Mr. Draghi said. “There is a consensus about not being resigned and accepting this as a fact of nature.”“There is consensus about being dissatisfied with the projected path of inflation,” Mr. Draghi said. “There is a consensus about not being resigned and accepting this as a fact of nature.”
But he declined to offer specifics about the possible next steps. And at least on Thursday, conditions apparently did not impress the governing council enough to act yet. There was also concern about the euro exchange rate, he said. On Thursday, the euro neared $1.40 as investors sought refuge from turmoil elsewhere in the world. A strong euro makes products from the euro zone more expensive in foreign markets, and tends to push inflation down even further because imported goods become cheaper.
Mr. Draghi also said the E.C.B. was concerned about geopolitical tensions, making several specific references to the crisis in Ukraine. Mr. Draghi did not say, however, what action the European Central Bank might take. And he said that the governing council wanted to wait for the next round of economic projections by the bank’s experts, due before the next monetary policy meeting on June 5.
Annual inflation in the euro zone was 0.7 percent in April, according to an official estimate, which is well below the central bank’s target of close to 2 percent. Such low inflation is risky, some economists say, because it leaves the euro zone vulnerable to a ruinous downward price spiral known as deflation that might be set in motion by some sort of shock, like a worsening of tensions in Ukraine. The central bankers left the main rate at 0.25 percent, a record low. While many economists have called for more decisive action to stimulate the euro zone economy, members of the bank’s governing council have appeared reluctant to deploy the more radical measures that would be required to do so.
Mr. Draghi said Thursday that the bank was committed “to using also unconventional instruments within its mandate,” a reference to so-called quantitative easing, or large purchases of bonds or other financial instruments to pump money into the economy. Most analysts, though, expect the E.C.B. to cut its main interest rate close to zero before taking more radical steps.
Annual inflation in the euro zone was 0.7 percent in April, according to an official estimate, which is well below the central bank’s target of close to 2 percent. Such low inflation is risky, some economists say, because it leaves the euro zone vulnerable to a ruinous downward price spiral known as deflation that might be set in motion by some sort of shock, like a worsening of the crisis in Ukraine.
Modest inflation is considered healthy, in part because it eases the burden on debtors in a region where many countries, companies and individuals are having problems repaying their loans.Modest inflation is considered healthy, in part because it eases the burden on debtors in a region where many countries, companies and individuals are having problems repaying their loans.
The problem facing the central bank is that, while it is standard practice to keep a lid on excess inflation by raising rates, inducing an increase in inflation is much more difficult. It might require the bank to use measures that have never been tested in the euro zone, such as huge purchases of government bonds or other assets to pump money into the economy. The problem facing the central bank is that, while it is standard practice to keep a lid on excess inflation by raising rates, inducing an increase in inflation is much more difficult. It might require the bank to use measures that have never been tested in the euro zone, such as huge purchases of government bonds or other assets.
Mr. Draghi, the E.C.B. president, said in April that the bank was prepared to make asset purchases, a strategy similar to the quantitative easing, or Q.E., used in the United States by the Federal Reserve. But most analysts did not expect the E.C.B. to take action yet — and the bank did not on Thursday. Mr. Draghi said in April that the bank was prepared to make asset purchases, a strategy similar to the quantitative easing, or Q.E., used in the United States by the Federal Reserve. But most analysts did not expect the E.C.B. to take action yet — and the bank did not on Thursday.
“The E.C.B. embarking on Q.E. would mark a game changer,” analysts at Morgan Stanley said in a note to clients this week. But they added that they did not expect the central bank to do so at the moment. “Only in our bear-case, which sees the euro area sliding back into recession and inflation dwindling into deflation territory, would we expect such a move.” “The E.C.B. embarking on Q.E. would mark a game changer,” analysts at Morgan Stanley said in a note to clients this week. But they added that they did not necessarily expect the central bank to do so. “Only in our bear-case, which sees the euro area sliding back into recession and inflation dwindling into deflation territory, would we expect such a move.”
For now, the central bank appears to be hoping that inflation will rise as the euro zone economy picks up speed. Countries including Spain, Portugal and Ireland show clear signs that they are emerging from the crisis. But unemployment remains high and credit remains tight for businesses in those and other countries like Greece and Italy. Countries including Spain, Portugal and Ireland show clear signs that they are emerging from the crisis. But unemployment remains high and credit remains tight for businesses in those and other countries like Greece and Italy.
Analysts at Nomura forecast that the central bank will take action in June by cutting interest rates to 0.15 percent rather than by initiating an asset purchase program.Analysts at Nomura forecast that the central bank will take action in June by cutting interest rates to 0.15 percent rather than by initiating an asset purchase program.
Some analysts say that the central bank faces too many constraints to be able to deploy quantitative easing. There is no Pan-European debt instrument similar to the Treasuries that the Fed purchased as part of its program, for example. There are also legal restraints on the European Central Bank that do not bind the Fed.Some analysts say that the central bank faces too many constraints to be able to deploy quantitative easing. There is no Pan-European debt instrument similar to the Treasuries that the Fed purchased as part of its program, for example. There are also legal restraints on the European Central Bank that do not bind the Fed.
“If the E.C.B. could have bought bonds in a traditional Q.E. operation,” Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., said in a note, “it would have done so already.”“If the E.C.B. could have bought bonds in a traditional Q.E. operation,” Carl B. Weinberg, the chief economist at High Frequency Economics in Valhalla, N.Y., said in a note, “it would have done so already.”