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Lowering Forecast, European Central Bank Keeps Rate Steady European Central Bank Debates Options, but Stands Pat
(about 2 hours later)
FRANKFURT — Defying some calls for bolder action, the European Central Bank left its benchmark interest rate unchanged on Thursday, even as it changed its economic forecast to a gloomier reading for the rest of the year. FRANKFURT — The European Central Bank debated ways to funnel more credit to suffering euro zone businesses Thursday, but decided not to act because it was not sure which way the economy was heading. The bank also left its benchmark interest rate unchanged at its already record low rate.
The E.C.B. left its main rate at 0.5 percent, as expected. Despite ever more insistent calls from economists for more aggressive moves to stimulate lending in the euro zone, the E.C.B. may have decided it needed to assess the significance of a slight uptick in inflation as well as some evidence that consumers and business managers are becoming less pessimistic. The lack of any action illustrated the gulf between those at the central bank who expect a recovery, even if weak, by the euro zone economy — which has been shrinking for a year and a half — and economists and central bankers elsewhere who fear that the euro zone is sinking ever deeper into stagnation.
In a news conference after the announcement, Mario Draghi, the president of the E.C.B., cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries. Mario Draghi, the president of the E.C.B., said at a news conference Thursday that the bank’s Governing Council, meeting earlier in the day, had an “ample discussion” about measures to stimulate the economy. Those, he said, included even taking the unprecedented step of imposing a de facto penalty on commercial banks that hoard cash rather than lend it.
He also said the central bank was lowering its 2013 economic forecast for the euro area, now expecting the region’s economy to shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year — slightly higher than previous forecasts. But amid uncertainty about what recent economic indicators are saying about future growth, “we see no reason to act at this point,” Mr. Draghi said at a news conference.
The E.C.B. had hinted in recent months the bank was considering additional unconventional measures to fix a credit crunch in southern Europe. That might even include the unprecedented step of obliging banks to pay to store their money at the central bank, rather than earning interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work, by lending it. Mr. Draghi indicated that the central bank’s governing council, which met before he spoke, had considered that move but decided not to proceed with it. “The Governing Council agreed there was not any directional change that would justify taking action at this time,” he said, even as the E.C.B.'s own economists changed their economic forecast to a gloomier reading for the rest of the year.
Judging from recent speeches by E.C.B. policy makers, they are concentrating more on getting banks to deal with problem loans and other issues that may be interfering with their ability to lend. The downward revision projected that the euro zone’s economy would shrink by 0.6 percent this year, worse than the 0.5 percent decline previously forecast. But the central bank expects growth in the euro zone of 1.1 percent next year, slightly higher than previous forecasts.
Mr. Draghi called for euro zone policy makers to move forward with a uniform system for winding down failing banks in an orderly manner. The E.C.B. left its main interest rate at 0.5 percent, a record low. Most analysts did not expect the bank to cut the rate only a month after reducing it from 0.75 percent.
Marie Diron, an economist who advises the consulting firm Ernst & Young, said that, while fixing weak banks was a worthy goal, it was unlikely to yield dividends for some time. In recent months, Mr. Draghi has floated some unconventional ways of steering credit to countries like Italy and Spain, where even healthy companies have trouble getting bank loans. For example, he has raised the possibility that the E.C.B. would work with the publicly owned European Investment Bank to make it easier for banks to package and sell bundles of small-business loans.
While “a cleanup of banks’ balance sheets is necessary to ensure sustained growth in the medium term, it would probably be negative for growth in the short term,” Ms. Diron wrote in an e-mail before the meeting Thursday. “It is not clear why the E.C.B. seem to have changed its focus since early May.” The E.C.B. had even said it was considering obliging banks to pay to store their money at the central bank, rather than earn interest on it — resulting in a so-called negative deposit rate. The goal would be to force banks to put their money to work by lending it. Mr. Draghi indicated that the central bank’s Governing Council had considered that move Thursday but decided not to proceed with it.
Some recent economic indicators have kept alive hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent. Economists who have been pressing the central bank to take more aggressive action to stimulate the economy were disappointed.
Many economists have urged the E.C.B. to be bolder, as unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France on Thursday reported a 10.8 percent unemployment rate for the first quarter, also a record high “The E.C.B. had increased expectations that it would be able to present a new quick fix for the real economy” by increasing lending to small and midsize businesses, Carsten Brzeski, an economist at ING Bank, said in a note to clients. “Today’s press conference shows that the ECB has returned into its garage, carefully studying what is left there.”
James Bullard, president of the Federal Reserve Bank of St. Louis, said in Frankfurt last month that the E.C.B. should consider so-called quantitative easing similar to that undertaken by the Fed — large bond purchases meant to drive down market interest rates. During his news conference, Mr. Draghi cited “downside risks surrounding the economic outlook for the euro area.” Those, he said, include the possibility of weaker-than-expected domestic and global demand and slow or insufficient policy changes in euro zone countries.
It is very unusual for central bankers to put pressure on their peers so publicly. But Mr. Bullard warned that Europe was acting as a dead weight on the global economy. Mr. Draghi made it clear that he did not belong to those who believed the euro zone was heading down the same path as Japan, which has struggled for two decades to achieve sustained growth. Mr. Draghi told reporters that he saw no danger of deflation — a broad decline in prices that can throttle business investment and has afflicted Japan.
“You have to be concerned,” he told an audience in Frankfurt. “The European Union as a whole is the biggest economy in the world.” Price declines in some countries were the result of lower prices for oil and food, he said, not the “explosive dynamics downward” that would meet his definition of deflation.
“We don’t see anything like that in any country,” Mr. Draghi said.
Some recent economic indicators have kept alive the hope that the euro zone is close to hitting bottom. Surveys have shown that businesses and consumers are a little less pessimistic than they were. And inflation has accelerated slightly, although it is still below the E.C.B. target of about 2 percent.
Many economists point out that signs of a recovery are very weak and have urged the E.C.B. to be bolder. Unemployment remains a persistent problem, with joblessness in the euro zone at a record high of 12.2 percent. France reported on Thursday a 10.8 percent unemployment rate for the first quarter, also a record high.
Marie Diron, an economist who advises the consulting firm Ernst & Young, expressed disappointment that the central bank had not done more to ensure that record-low interest rates were reaching businesses and consumers in troubled euro countries, where market rates remained punishingly high. She wrote in an e-mail, “The E.C.B. needs to intervene to ensure that its very accommodative monetary policy reaches the real economy.”