The European Central Bank is weighing whether to increase its efforts to boost stubbornly low inflation in the 19-country eurozone at Thursday’s meeting of its governing council. The 25-member council led by President Mario Draghi could decide to extend its current bond-buying stimulus program, which is pumping newly printed money into the financial system.
Some analysts, however, think the bank is more likely to postpone action to its October or December meetings, or not act at all.
Draghi and the ECB are faced with inflation of only 0.2 percent annually, far below the bank’s target of just under 2 percent. Chronically low inflation suggests the economy is not hitting on all cylinders, even though the currency union is enjoying a moderate economic upswing. Low inflation also makes it harder for heavily indebted eurozone states such as Greece to become more price competitive relative to other economies.
New inflation projections compiled by ECB staff may give some hint about the bank’s future actions. In June, they forecast inflation of 1.3 percent for next year and 1.6 percent in 2018. Lowering them would support arguments for more action.
The central bank’s situation contrasts with that of the U.S. Federal Reserve, which is weighing withdrawing stimulus by raising interest rate as the U.S. economy recovers more strongly. Fed Chair Janet Yellen has said the case has strengthened for more rate increases on top of a quarter point hike made from near zero in December. The Fed nonetheless has some of the same concerns as the ECB, including the potential fallout from Britain’s future EU exit.
So far, the ECB has slashed its benchmark interest rate to zero, with the aim of lowering borrowing costs for companies and consumers. It has poured 1 trillion euros of newly created money into the banking system through bond purchases, out of what is to be 1.74 trillion euros through at least March 2017. It has also imposed a negative interest rate of 0.4 percent on deposits left with it by commercial banks. That is in effect a tax aimed at forcing banks to lend excess cash, instead of hoarding it.
But inflation has been slow to respond. The question is whether the ECB needs to do more now, or wait and let previously announced measures take their full effect before contemplating additional steps.
Some economists question how much good more central bank action will do, in the absence of steps from European governments to improve growth. Draghi has urged governments that have the money to invest more in infrastructure, and to cut back on red tape and regulatory permissions that make it harder to start a business.
Britain’s June 23 vote to leave the European Union has raised concerns that trade with the eurozone might suffer, hurting European growth. But so far there has been little hard data to show that’s happening.
The ECB could extend the earliest end date for its 80 billion euros monthly purchases beyond the current March, 2017. It has said the purchases will continue until then or until inflation picks up. It could also loosen its self-imposed limits on how much of any particular bond issue or issuer’s bonds it can buy. That would reassure anyone worrying that the bank will have to end the stimulus effort early for lack of bonds to purchase.
It also could eliminate its ban on buying bonds yielding less than the minus 0.4 percent deposit rate. That also would enlarge the universe of bonds it could buy; German two-year government bonds currently yield minus 0.67 percent.