Tue, 24 Sep 2019

ECB Faces Key Stimulus Decision as Draghi Era Nears End

Voice of America
12 Sep 2019, 00:35 GMT+10

FRANKFURT, GERMANY - European Central Bank head Mario Draghi is likely preparing a new shot of stimulus to prop up economic growth and inflation, though doubts are growing about whether central banks like the ECB and the U.S. Federal Reserve can save the global economy by themselves.

The ECB is likely to cut a key interest rate further below zero on Thursday and could take additional steps including launching bond purchases to pump newly created money into the economy, analysts say.

Some ECB officials have questioned how much good another large blast of stimulus will do. Uncertainty about how far the bank will go at Draghi's next-to-last meeting sets up a dramatic finale to his eight-year term as head of the monetary authority for the 19 countries that use the euro.

Draghi gave clear hints in a speech in June and after the bank's last meeting July 25 that more action was on the way to counter a slowdown in economic growth blamed in large part on the U.S.-China trade dispute, which has unsettled companies worldwide.

Analysts think the ECB will cut the rate on deposits that it takes from commercial banks from a current minus 0.4% to minus 0.5% or even minus 0.6%.

The unusual negative rate, in effect a penalty aimed at pushing banks to lend spare cash rather than let it pile up overnight at the central bank, suggests how stretched monetary policy has become in the wake of the Great Recession.

Beyond that, the ECB's 25-member governing council could extend its current promise not to raise rates before mid-2020.

And it could decide to resume bond purchases that were stopped in December before economic data took a turn for the worse. Florian Hense, an analyst from Berenberg bank, said the ECB could purchase 30 billion euros ($33 billion) in government and corporate bonds a month for at least 12 months.

The bank purchased 2.6 trillion in bonds ($2.9 trillion) over almost four years, a step that drives up bond prices and drives down interest yields, since prices and yields move in opposite direction. Anticipation of more purchases has driven government bond yields across Europe below zero , meaning governments get paid to borrow and investors are willing to pay for a safe place to stash their money.

The Fed is also moving in the direction of more stimulus. The Fed cut its key policy rate in July for the first time in a decade, to a new range of 2% to 2.25%. Markets believe there is a near certainty the Fed will cut rates for a second time at its next meeting Sept. 17-18.

Yet there are doubts about how much good looser monetary policy can do. Among the big issues hurting business confidence are political standoffs such as the trade war and Britain's uncertain exit from the European Union.

Draghi's designated successor, Christine Lagarde, told member of the European Parliament that fiscal policies, or government spending, "need to be available to stabilize our economies through downturns and avoid overburdening monetary policies." She urged governments to take pro-business reforms and spend on growth-friendly investment where possible.

"I'm not a fairy," she added. "Central banks are not the only game in town."

Lagarde, who resigned as head of the International Monetary Fund effective Friday after being nominated for the ECB presidency by European governments, is to take over from Draghi on Nov. 1.

Draghi has also urged governments that are in good financial shape to spend more on things that would promote growth, but has largely been ignored. Germany, the eurozone's biggest member, continues to run budget surpluses despite urging from the IMF to spend more on infrastructure such as by extending high-speed internet to all areas of the country.

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