ECB keeps rate flat, eyes change in March
Print Edition
MARIO Draghi let rattled investors know yesterday that the European Central Bank is ready to take action if plunging oil prices and weaker growth in China hurt the economy.
But he didn’t go any further than words.
The chief monetary authority for the 19 countries that use the euro currency left its key interest rates untouched and didn’t ramp up its existing 1.5-trillion-euro (US$1.6 trillion) monetary stimulus program.
Draghi noted that inflation remains far below the ECB’s target of just below 2 percent, considered a healthy level for economic growth.
“It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March,” he said in Frankfurt.
“The economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms,” Draghi said.
The ECB decided to leave its benchmark interest rate flat at a record low 0.05 percent.
Until that changes or other measures are taken, markets may have to find their own way forward without counting on more help from central banks — a prospect investors may find unnerving.
The ECB already increased its stimulus at its December 3 meeting, and analysts say it would need solid evidence that stimulus isn’t working before acting again.
For its part, the US Federal Reserve has already begun withdrawing stimulus. Last month, it made its first interest rate increase in seven years. Other key central banks such as the Bank of England may have little left to add after years of near-zero interest rates and injections of newly printed money into their financial system.
Disagreements among members of the 25-member ECB governing council could be an obstacle to further stimulus. At the December meeting, some wanted more stimulus and some wanted none at all. That presents a challenge to Draghi’s ability to persuade a broad majority to back any more stimulus if he decides that’s the way to go.
At the December 3 meeting, the governing council expanded an existing stimulus program based on 60 billion euros in monthly purchases of government and low-risk private sector bonds by extending the purchases for another six months through March 2017. The purchases are made with newly-created money, so they increase the amount of money in the financial system and in theory should boost inflation and also lending to support business.
The council also cut the interest rate on deposits at the ECB from commercial banks by 0.1 percentage points to negative 0.3 percent. The idea is to make banks pay for leaving money unused and push them to lend it instead.
Yet analysts say very low oil prices will keep more stimulus on the table for the ECB in coming months, however. Cheaper oil could push the inflation below the already low annual rate of 0.2 percent, far below the bank’s goal of just under 2 percent considered best for the economy.
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