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European Central Bank Leaves Interest Rate Unchanged European Central Bank Leaves Interest Rate Unchanged
(about 1 hour later)
FRANKFURT — The European Central Bank left its benchmark interest rate unchanged on Thursday, a decision overshadowed by speculation about what other options might be available to revive the eurozone economy.FRANKFURT — The European Central Bank left its benchmark interest rate unchanged on Thursday, a decision overshadowed by speculation about what other options might be available to revive the eurozone economy.
The decision to keep the benchmark interest rate at 0.05 percent was a formality because the rate is already effectively as low as it can go. An increase would be out of the question when eurozone growth is slowing.The decision to keep the benchmark interest rate at 0.05 percent was a formality because the rate is already effectively as low as it can go. An increase would be out of the question when eurozone growth is slowing.
Instead, analysts and investors were attentive on Thursday to any clues about whether the central bank is moving toward more powerful but more contentious methods of stimulating the eurozone economy, such as large-scale purchases of government bonds.Instead, analysts and investors were attentive on Thursday to any clues about whether the central bank is moving toward more powerful but more contentious methods of stimulating the eurozone economy, such as large-scale purchases of government bonds.
At a news briefing, Mario Draghi, the president of the European Central Bank, said that the bank's Governing Council had been unanimous “in its commitment to using additional unconventional instruments within its mandate.” He said that the council had charged the central bank staff and “the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed.”
Since it last met a month ago, the central bank has begun buying private sector assets known as covered bonds, bundles of bank loans packaged for sale to investors and guaranteed by issuing banks. As of Oct. 31, the central bank had spent 4.8 billion euros, or about $6 billion, buying covered bonds. It plans to make more purchases in the coming months.Since it last met a month ago, the central bank has begun buying private sector assets known as covered bonds, bundles of bank loans packaged for sale to investors and guaranteed by issuing banks. As of Oct. 31, the central bank had spent 4.8 billion euros, or about $6 billion, buying covered bonds. It plans to make more purchases in the coming months.
Because the supply of private sector assets that meet the central bank’s quality standards is limited, many analysts expect it to eventually resort to purchases of government bonds, emulating the quantitative easing used by the Federal Reserve in the United States. The European Central Bank is widely seen as having acted timidly compared with the Federal Reserve or the Bank of England.Because the supply of private sector assets that meet the central bank’s quality standards is limited, many analysts expect it to eventually resort to purchases of government bonds, emulating the quantitative easing used by the Federal Reserve in the United States. The European Central Bank is widely seen as having acted timidly compared with the Federal Reserve or the Bank of England.
“We need to see more coming out of the E.C.B.,” Mark Zandi, chief economist at Moody’s Analytics, said in Frankfurt on Wednesday.“We need to see more coming out of the E.C.B.,” Mark Zandi, chief economist at Moody’s Analytics, said in Frankfurt on Wednesday.
But full-scale quantitative easing would inevitably provoke an outcry in Germany, and most analysts do not expect the central bank to begin buying government bonds until next year, if ever.But full-scale quantitative easing would inevitably provoke an outcry in Germany, and most analysts do not expect the central bank to begin buying government bonds until next year, if ever.
In Germany, there is widespread fear that central bank bond buying would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans believe they would have to pick up the tab if some countries defaulted on bonds owned by the bank.In Germany, there is widespread fear that central bank bond buying would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans believe they would have to pick up the tab if some countries defaulted on bonds owned by the bank.
Joining the advocates for a more aggressive approach by the central bank was Ángel Gurría, the secretary general of the Organization for Economic Cooperation and Development.Joining the advocates for a more aggressive approach by the central bank was Ángel Gurría, the secretary general of the Organization for Economic Cooperation and Development.
“There is an increasing risk of stagnation in the euro area,” Mr. Gurría said Thursday morning at a news conference in Paris. “Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth.”“There is an increasing risk of stagnation in the euro area,” Mr. Gurría said Thursday morning at a news conference in Paris. “Countries must employ all monetary, fiscal and structural reform policies at their disposal to address these risks and support growth.”
But because of the political risk, Mr. Zandi of Moody’s said it was more likely that the central bank would buy corporate bonds, debt issued by businesses, which would be less contentious.But because of the political risk, Mr. Zandi of Moody’s said it was more likely that the central bank would buy corporate bonds, debt issued by businesses, which would be less contentious.
Recent economic data has added pressure on the central bank to act. The annual rate of inflation in the eurozone was 0.4 percent in October, up from 0.3 percent in September but still dangerously low in the eyes of many economists. In addition, eurozone unemployment remains at 11.5 percent.Recent economic data has added pressure on the central bank to act. The annual rate of inflation in the eurozone was 0.4 percent in October, up from 0.3 percent in September but still dangerously low in the eyes of many economists. In addition, eurozone unemployment remains at 11.5 percent.
While the eurozone is not officially in deflation, a destructive downward price spiral, even the current low level of inflation can cause consumers to delay making purchases, companies to lose revenue and unemployment to soar from its already high levels.While the eurozone is not officially in deflation, a destructive downward price spiral, even the current low level of inflation can cause consumers to delay making purchases, companies to lose revenue and unemployment to soar from its already high levels.