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E.C.B. Signals Broader Action to Stimulate Europe’s Economy For E.C.B.'s Draghi, Promises Are Still His Main Policy Option
(about 5 hours later)
FRANKFURT — The European Central Bank on Thursday moved closer to the same kind of large-scale purchases of government bonds used by the Federal Reserve to stimulate growth in the United States, implying that it was ready to pump as much as 1 trillion euros into the economy. FRANKFURT — Mario Draghi may have invented a new kind of policy tool. Call it verbal quantitative easing.
“This is the main message: The balance sheet will continue to expand,” Mario Draghi, the president of the central bank, said at a news conference. He added that if current measures, including purchases of private sector assets, did not do the job, the central bank was ready to go further. With some well-chosen words, Mr. Draghi, the president of the European Central Bank, sent a strong message on Thursday that more aggressive measures were in the works, even possibly the large-scale bond purchases known as quantitative easing.
European stock indexes rose as investors interpreted the remarks to mean that the central bank was moving closer to quantitative easing, or Q.E., the large-scale buying of government bonds, which is also known as sovereign debt. “The governing council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Mr. Draghi said.
“We’re one step closer to full-blown sovereign Q.E.,” Luke Bartholomew, investment manager at Aberdeen Asset Management, said in a statement. Two years ago, Mr. Draghi turned the tide in the eurozone crisis merely by promising to do “whatever it takes” to preserve the currency bloc. He is now soothing the markets again with the promise of stronger economic medicine. He also addressed concerns about the divisions in the E.C.B. over its next steps.
The bank left its benchmark interest rate unchanged on Thursday, at 0.05 percent. The announcement was a formality because the rate is already effectively as low as it can go, and an increase would be out of the question when eurozone growth is slowing. But the question remains: How long will Mr. Draghi be able to appease the markets with incremental measures and updates that end with the effective equivalent of “tune in next month.” Even if markets remain calm, the larger issue is whether the E.C.B. will be able to reverse the worrisome deflationary trend that has plagued the economy.
At the news briefing, Mr. Draghi said that the bank’s governing 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.” Mr. Draghi offered little specifics about how the E.C.B. would inject more stimulus into the economy. A large bond-buying program — like the six-year campaign the Federal Reserve just ended — faces significant legal and political challenges in Europe.
Major indexes in Europe initially rose about 1 percent after Mr. Draghi made those assurances, then fell back, with the Euro Stoxx 50-stock index closing 0.34 percent higher. “As far as verbal intervention by central bankers is concerned, Mr. Draghi has no equal,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in a note to clients. “Yet the reality is that the only thing that changed today is market perceptions of the E.C.B.”
Mr. Draghi also sought to rebut reports of dissension among the 24 members of the central bank’s governing council, which includes all the heads of national central banks in the eurozone. He emphasized that all members had signed off on a statement implying increased readiness to deploy quantitative easing. If the economy continues to sour, the markets may lose faith.
“It’s fairly normal to disagree about things,” he said. At their customary dinner on Wednesday night, Mr. Draghi said, members of the council had “perhaps the best discussion we ever had.” Many economists and policy makers remain frustrated by the E.C.B.'s reluctance to do what the Fed, the Bank of England and the Bank of Japan have already done without any sign of the inflation that critics had predicted. On Thursday, Ángel Gurría, the secretary general of the Organization for Economic Cooperation and Development, joined those advocating a more aggressive approach.
Carsten Brzeski, an analyst at ING Bank, said in a note to clients, “If there was any internal conflict within the governing council, Mario Draghi hushed it.” “There is an increasing risk of stagnation in the euro area,” Mr. Gurría said 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.”
Mr. Draghi said the central bank’s recent steps, including the private asset purchases and cheap loans made available to banks, are expected to increase the size of its balance sheet “towards the dimensions it had at the beginning of 2012.” Recent economic data has added pressure on the European Central Bank to begin more aggressive stimulus measures. The annual rate of inflation in the eurozone was 0.4 percent in October. That was up from 0.3 percent in September but still dangerously low in the eyes of many economists. Eurozone unemployment, meanwhile, remained at a stubbornly high 11.5 percent, according to data for September.
The value of central bank assets, including gold, money owed by banks, and securities owned by the bank, was about €3 trillion, or about $3.75 trillion, at the end of March 2012, compared with €2.1 trillion this month. The eurozone is not officially in deflation, a destructive downward spiral in prices. But even the current low level of inflation can cause consumers to delay making purchases, companies to lose revenue and unemployment to soar above its already-high levels.
The central bank’s balance sheet peaked in 2012 as banks took advantage of cheap central bank loans to compensate for a dearth of market funds. The decline in oil prices, which are below $80 a barrel, have also held back inflation. Falling food prices, too, are complicating matters. The United Nations Food and Agriculture Organization reported on Thursday that world food prices fell in October for a seventh straight month, and it announced a forecast for a record global wheat crop this growing season.
Mr. Draghi said he expected the supply of private-sector assets to expand because of central bank demand. But he said it was too early to give specifics on how the bank would expand its holdings by such a large amount. Even if European Central Bank policy is still doing little to rekindle inflation to a healthier level — the bank’s target is just below 2 percent — there is a method to Mr. Draghi’s approach.
Most analysts assume, however, that the bank will eventually have no choice but to buy government bonds to have enough of an impact on the economy. To avoid alienating Germany, Mr. Draghi must first try everything short of large-scale government bond purchases. There is widespread fear in Germany that central bank bond-buying would amount to a transfer of wealth from better-off countries to poorer ones. Many Germans worry that they would have to pick up the tab if some countries defaulted on bonds owned by the European Central Bank.
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. Mr. Draghi must also take care to avoid an open split on his governing council with Jens Weidmann, the president of the German central bank, who is a vocal opponent of government bond-buying.
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. The European Central Bank is widely seen as having acted timidly compared with the Federal Reserve or the Bank of England. The European Central Bank has already been buying private-sector assets since early October — 4.8 billion euros, or about $5.9 billion, in total so far. But Jörg Krämer, chief economist at Commerzbank in Frankfurt, and other analysts say there is no way the central bank can hit the €1 trillion target without resorting to purchases of government bonds.
“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. To paraphrase Winston Churchill, Mr. Draghi will do the right thing only after exhausting all the alternatives.
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. “I’m quite sure in the end Draghi will say, ‘Jens, we have to buy government bonds,’ ‘' Mr. Krämer said, referring to Mr. Weidmann.
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 was more than just rhetoric in Mr. Draghi’s appearance at his news conference after Thursday’s monthly meeting of the governing council.
“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.” Mr. Draghi has said on previous occasions that the central bank would increase its balance sheet to the same level as the beginning of 2012. That had implied that the central bank would spend €1 trillion by buying bonds or issuing cheap loans to commercial banks.
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. On Thursday, the central bank solidified those commitments and set a deadline. In its official statement, the E.C.B. indicated that it would aim to increase its balance sheet by €1 trillion by 2016.
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. “We’re one step closer to full-blown sovereign Q.E.,” Luke Bartholomew, investment manager at Aberdeen Asset Management, said in a statement, referring to quantitative easing.
This stimulus goal was also signed by all members of the governing council. The unanimous endorsement erased doubt that Mr. Draghi might have been promising more than the rest of the council was prepared to deliver. And it also helped quash speculation of dissension within the council.
“It’s fairly normal to disagree about things,” Mr. Draghi said. At their customary dinner on Wednesday night, he said, members of the council had “perhaps the best discussion we ever had.”
Carsten Brzeski, an analyst at ING Bank, wrote in a note to clients, “If there was any internal conflict within the governing council, Mario Draghi hushed it.”
The central bank’s statement also said that its staff and committees had begun preparing additional policy measures, should they be needed. While Mr. Draghi gave no deadline for them to present the plans, the statement was intended to show that groundwork was being laid.
“This is the main message: The balance sheet will continue to expand,” Mr. Draghi said.