ECB weighs further action as economic picture darkens
The European Central Bank will spell out the scale of economic malaise facing the eurozone after it meets on Thursday under growing pressure to take dramatic action to prevent the bloc going into reverse.
With recovery stalled across much of the 18-country euro area, ECB President Mario Draghi will present updated forecasts from the bank’s staff for growth in output as well as inflation.
Both measures are likely to be downgraded further.
While the ECB could extend a scheme to buy rebundled debt to purchasing corporate bonds, it is unlikely that Draghi will announce any radical immediate move to shore up the economy, such as printing money to buy government bonds.
Economists, roughly half of whom expect the bank to start buying government bonds – a step that should buoy the economy when banks exchange bonds for ECB cash – have penciled this in for the first three months of next year.
ECB Vice-President Vitor Constancio said last week that the bank would be better able to gauge in the first quarter whether it needed to start buying sovereign bonds.
Quantitative easing, following in the footsteps of the US Federal Reserve, will be harder in the eurozone because of the divisions between debt-shy countries such as Germany and southern states including Greece.
Germany, the bloc’s biggest economy by far and its most influential, fears it would encourage reckless borrowing.
“The eurozone needs growth and jobs to ensure that it survives,” said Lena Komileva of consultancy G+ Economics, warning of the obstacles to so-called quantitative easing.
“Germany’s strong opposition … raises questions about its ability to act fast enough.”
Eurozone inflation, a key yardstick of the economy’s health and viewed by investors as a trigger for the ECB to buy government bonds, slowed to just 0.3 percent last month.
If prices were to start to falling, as they already have in some countries, that could discourage consumers from shopping while they wait for goods to get cheaper, creating a vicious circle that pulls down the economy.
A conflict in Ukraine, which has frozen much of EU-Russian commerce, a slowdown in momentum in China and war in Syria add to the gloom.
A survey released on Wednesday suggested the eurozone economy may contract again early next year.
The ECB has already cut borrowing costs to record lows, given cheap loans to banks and started buying reparceled debt to kick-start lending.
On Thursday, Draghi is likely to reiterate its willingness to do more if necessary.
[Reuters]
