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Fresh Signs Point to Possible European Central Bank Stimulus Plan Fresh Signs Point to Possible European Central Bank Stimulus Plan
(about 11 hours later)
FRANKFURT — The European Central Bank appears ever more certain to take aggressive action to combat low inflation in the euro zone after the German Bundesbank signaled it was open to unprecedented measures as a way to stimulate growth. FRANKFURT — Top officials of the European Central Bank sent strong signals Wednesday that action to stimulate the economy was all but certain next month. But they also made it clear that the bank was unlikely to employ a powerful injection of money into the economy.
Further reinforcing expectations of action, a top E.C.B. official argued in Berlin on Wednesday that — despite a pending legal challenge — the central bank would not be in violation of its mandate if it bought government bonds. The comments by Yves Mersch, a member of the central bank’s executive board, could be interpreted as opening the door wider to large asset purchases as a way to stimulate the economy. Such a boost, which the Federal Reserve in the United States accomplished through huge purchases of government bonds, is seen by many analysts as necessary to prevent the euro zone from tipping into a new crisis.
Expectations that the central bank would act, probably in June, were already high after Mario Draghi, the president of the bank, said last week that there was a consensus on its governing council that inflation, at 0.7 percent, was too low. At its meeting in June, the central bank is likely to cut the main interest rate to close to zero, begin penalizing banks for hoarding cash by means of negative interest rates and perhaps issue a new round of cheap loans to banks, according to the comments by the central bankers. The E.C.B. could also buy assets like packages of bank loans.
“The governing council is not resigned to having low inflation for too long a time,” Mr. Draghi said last week at a news conference in Brussels. “The governing council is comfortable with acting next time,” he said, although he added that policy makers wanted to see the latest forecasts from central bank economists before making a final decision. Expectations were already high that the bank would do something to promote growth at its June 5 meeting. Mario Draghi, the president of the bank, said last week that a consensus on the bank’s governing council thought that inflation was too low and something should be done about it.
The Bundesbank would not oppose measures such as further low-cost loans to banks or negative deposit rates if such measures were deemed necessary, according to a person within the bank who was not authorized to be quoted by name. The Bundesbank also would not oppose purchases of packages of bank loans, the person said, which could make it easier for banks to lend money in troubled countries such as Italy or Spain. But the outlook for inflation and the state of the European economy would have to become significantly worse before the central bank would begin buying government bonds wholesale, Peter Praet, a member of the executive board of the bank, told the German newspaper Die Zeit in an interview published Wednesday.
The Bundesbank’s views were first reported by The Wall Street Journal and by several German newspapers. Continued reluctance by the E.C.B. to deploy so-called quantitative easing will come as a disappointment to many economists, who warn that the euro zone faces the same kind of prolonged stagnation that has gripped Japan.
The euro fell on Tuesday after the reports. However, the person at the Bundesbank suggested on Wednesday that currency markets may have overreacted. The Bundesbank has not fundamentally changed its position, said the person, who is familiar with the thinking of Bundesbank policy makers. “Any action that is likely to be taken is almost certainly going to be a case of too little, too late,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consultancy in London, said in an email Wednesday.
With the benchmark interest rate already at a record low of 0.25 percent, the central bank has been struggling to find ways to raise inflation and get banks to lend.
The bank’s main aim in imposing a negative deposit rate would be to lower the value of the euro against the dollar and other major currencies. A negative deposit rate would encourage investors to buy other currencies that pay a better return. Euro zone exporters benefit from a weaker currency because it makes their products cheaper in foreign markets. The bank has expressed concern that the euro is too strong.
“Negative deposit rates are a possible part of a combination of measures,” Mr. Praet told Die Zeit. “We are preparing a range of things.” He also said that the central bank could offer long-term loans to banks, with conditions attached to ensure that banks lent the money to businesses and consumers.
At 0.7 percent, annual inflation in the euro zone is below the 2 percent level that the central bank considers healthy. When inflation is that low, debtors have more trouble repaying their loans and there is a risk that some kind of shock could lead to deflation, a broad-based decline in prices that undercuts business investment and can lead to mass unemployment.
Such a shock could come from the current tensions in Russia and Ukraine. The European Bank for Reconstruction and Development, which is partly financed by the United States, warned Wednesday that the conflict could have severe economic consequences in Eastern Europe, countries of the former Soviet Union and the Middle East. That bank promotes economic development in those regions.
“The crisis in Russia and Ukraine is having a severe impact on the economies of the two countries and is threatening to slow down the recovery in the wider E.B.R.D. region — or even bring it to a complete halt,” the bank said Wednesday.
The statements by central bankers showed broad agreement on measures, short of quantitative easing, to combat such risks..
The Bundesbank, the German central bank, signaled that it would not object to more aggressive stimulus measures, which should in turn assure the support of the German public.
However, the Bundesbank set several caveats and remained opposed to the purchase of euro zone government bonds, which it regards as illegal.
Mr. Draghi indicated last week that the bank would announce stimulus measures at its June 5 meeting, assuming that there was no change in the long-term outlook for inflation.
“The governing council is not resigned to having low inflation for too long a time,” Mr. Draghi said last week at a news conference in Brussels. “The governing council is comfortable with acting next time.”
The euro fell on Tuesday after reports in The Wall Street Journal and several German newspapers that the Bundesbank would support unprecedented stimulus measures. On Wednesday, a person at the Bundesbank who is familiar with the thinking of top policy makers played down the reports. The person said the Bundesbank’s position had not fundamentally changed in recent months.
The euro rose slightly Wednesday to about $1.37.
The Bundesbank would not oppose measures like new low-cost loans to banks or negative deposit rates if such measures were deemed necessary, said the person at the bank, who spoke only on the condition of anonymity. The Bundesbank also would not oppose the purchase of packages of bank loans, the person said, which could make it easier for banks to lend money in troubled countries like Italy or Spain.
Jens Weidmann, the president of the Bundesbank, confirmed Wednesday that he was open to more stimulus.
The Bundesbank first indicated that it was open to unusual steps to stimulate the economy in March.The Bundesbank first indicated that it was open to unusual steps to stimulate the economy in March.
Whether Jens Weidmann, the president of the Bundesbank, supports additional E.C.B. action will depend on the latest data on the economic outlook, the person said. Projections for inflation in 2016 will be of particular importance. Mr. Weidmann is a vocal member of the European Central Bank’s governing council. He has often split with other members over policy and speaks for a significant number of Germans. His support for stimulus measures would reduce the risk that moves by the central bank to push up inflation would alienate the German public.
The person stressed that Mr. Weidmann was open to discussion about various measures but would not necessarily support all of them and did not view further stimulus as a done deal. Mr. Weidmann said he had not dropped his opposition to European Central Bank purchases of euro zone government bonds, which he regards as a violation of the bank’s mandate.
Mr. Weidmann is a vocal member of the European Central Bank’s governing council. He has often split with other members over policy and speaks for a significant number of Germans. His support for stimulus measures would reduce the risk that moves by the E.C.B. to push up inflation would alienate the German public. Another European Central Bank official, Yves Mersch, a member of the bank’s executive board, appeared to leave the door open to quantitative easing, saying in Berlin on Wednesday that the central bank would not be in violation of its mandate if it bought government bonds.
However, there was no indication that Mr. Weidmann or the Bundesbank had dropped their opposition to E.C.B. purchases of euro zone government bonds, which they regard as a violation of the E.C.B.'s mandate. Mr. Mersch defended the central bank’s promise to buy bonds of troubled countries to keep their borrowing rates under control.
Mr. Mersch, the E.C.B. executive board member, argued the opposite in Berlin on Wednesday, reinforcing expectations of imminent action. In a speech, Mr. Mersch defended the central bank’s promise to buy bonds of troubled countries to keep their borrowing rates under control. The program, never put into effect since its announcement in 2012, has been controversial in Germany and was the subject of a legal challenge in the country’s constitutional court. The German court referred the matter to the European Court of Justice, which is considering it.
The program, never implemented since its announcement in 2012, has been controversial in Germany and was the subject of a legal challenge in the country’s constitutional court. The German court referred the matter to the European Court of Justice, which is considering it. The European Central Bank’s mandate “includes the possibility of buying, under the appropriate conditions, government bonds on the secondary market,” Mr. Mersch said, according to a prepared text, “should this be necessary from a monetary policy perspective.”
The E.C.B.'s mandate “includes the possibility of buying, under the appropriate conditions, government bonds on the secondary market,” Mr. Mersch said, according to a prepared text, “should this be necessary from a monetary policy perspective.”
His comments, while referring to an existing program, could also be seen as leaving open the option for the central bank to make huge purchases of government bonds, the same kind of “quantitative easing” used by the Federal Reserve to stimulate the United States economy.
With the benchmark interest rate already at a record low of 0.25 percent, the E.C.B. has been struggling to find ways to raise inflation that is considered dangerously low.
One option would be a so-called negative deposit rate, in which the E.C.B. would charge banks to park money at the central bank. That measure has only rarely been used by central banks before and never in the euro zone, and there is the risk that it would have unpredictable effects.
One likely result would be a lower value of the euro against the dollar and other major currencies. Euro zone exporters benefit from a weaker currency because it makes their products cheaper in foreign markets.