European Central Bank ready to act if economy falters
The recent drag in economic data does not mean the eurozone is headed for a recession but the bank is ready to adjust, says European Central Bank head
FRANKFURT – European Central Bank head Mario Draghi said the bank is ready to use all its monetary levers in case the current economic slowdown takes a turn for the worse.
Draghi said that the bank was ready “to adjust all of its instruments” in case of unexpected trouble and added that risks to growth in the 19 counties that use the euro had grown.
Other than that, Draghi offered little indication the bank was preparing to deploy additional support for the economy and left its basic outlook little changed.
He stayed with his previous assessment that the recent worsening in economic data does not mean the eurozone is headed for a recession. Draghi spoke after a meeting of the bank’s 25-member rate-setting council left interest rates unchanged and did not touch key wording in the bank’s basic, three-paragraph policy statement.
He said the meeting was devoted to assessing “where we are, why are we here, and how long will the slowdown last.”
Upbeat factors such as rising wages and the ECB’s continued low interest rates had to be balanced against uncertainty about Brexit and increasing protectionism, he said. “At this point in time, we’re just assessing the situation.”
Draghi’s wait-and-see stance stood in contrast to comments earlier this month from U.S. Federal Chairman Jay Powell. Powell’s declaration that “there is no pre-set path to policy” suggested the Fed might hold off on rate increases that had been expected for this year, amid increased market turbulence.
Both the ECB and the Fed are trying to withdraw stimulus measures deployed in the aftermath of the global financial crisis and the Great Recession without roiling markets.
The eurozone grew a modest 0.2 per cent in the third quarter from the quarter before, while unemployment in Europe has fallen slowly but steadily to 7.9 per cent from its peak of over 12 per cent in early 2013. Worries have been stoked by weak figures for industrial production in Germany and other key economies. Analysts say the ECB will likely trim its projection for growth of 1.7 per cent this year when new staff estimates are produced for the March 7 meeting.
One risk is from a possible chaotic departure by Britain from the European Union. British Prime Minister Theresa May has been unable to win parliamentary approval for a negotiated exit from the EU, raising the chance of departure on March 29 without any new rules on getting goods in and out of the country.
Business confidence has also been hit by fears that the trade conflict U.S. and China will lead to more tariffs, or import taxes, that would lower global trade and growth. U.S. President Donald Trump has threatened to impose auto tariffs that would hit European manufacturers but has held off so far.
The ECB kept its short-term benchmark rate at 0 per cent. It also left the rate on deposits left overnight by commercial banks at minus 0.4 per cent, a penalty aimed at pushing banks to lend excess cash. Several analysts think the ECB could make the first increase in that rate in December, unless the economic outlook worsens.
The bank has also said it will maintain the 2.6 trillion-euro ($2.95 trillion) pile of government and corporate bonds that it bought with newly printed money over almost four years. By reinvesting the principal as those bonds are paid off, the ECB maintains the level of monetary stimulus. The Fed, which also bought bonds, is already letting its bond pile dwindle as the bonds mature, taking it further toward a more normal monetary policy due to the earlier and stronger U.S. recovery.