FILE - In this March 2, 2018 file photo, a worker cleans big machine parts of presses manufacturer Schüler AG in Goeppingen, Germany. German factory orders, a leading indicator of the health of Europe's biggest economy, dropped strongly in July, erasing gains from the previous month. The Federal Statistical Office reported Thursday industrial orders dropped 2.7% in July over June when adjusted for seasonal and calendar factors, wiping out a 2.7% June increase. (Marijan Murat/dpa via AP)

European Central Bank deploys new stimulus to help economy

September 12, 2019 - 9:25 am

FRANKFURT, Germany (AP) — The European Central Bank on Thursday delivered a new blast of monetary stimulus to help the shaky economy in the face of uncertainties like the U.S.-China trade conflict and Brexit.

The decision comes as central banks around the world including the U.S. Federal Reserve lower rates to support slowing trade and growth, despite nagging questions over how much good central banks can do when rates are already ultra-low.

In a wide-ranging package of measures that will ensure outgoing President Mario Draghi leaves a mark on the ECB's policies long after he leaves next month, the bank cut one key interest rate further below zero. It trimmed the rate on deposits it takes from banks to minus 0.5% from minus 0.4%, a penalty that pushes banks to lend excess cash.

The ECB, which sets policy for the 19 countries that use the euro, also said it would restart its bond-buying stimulus program, which pumps newly created money into the financial system to lower borrowing costs and help the economy. It will buy 20 billion euros ($22 billion) a month in government and corporate bonds for as long as needed.

The central bank furthermore extended its promise to keep rates at record lows until inflation goes back up to its goal of just under 2%. At last count, it was just 1%.

The ECB has joined the Fed and other central banks in making credit cheaper to help the economy. The Fed cut its key policy rate in July for the first time in a decade, to a range of 2% to 2.25%. Markets believe there is a near certainty the Fed will cut rates again at its next meeting Sept. 17-18.

Draghi was able to push the stimulus package through the ECB's 25-member governing council despite skepticism voiced by several members ahead of time. Some aspects of the package such as the rate cut and the bond purchases were smaller than some analysts expected although the open-ended timing could partly offset that.

The package ensures that the stimulus policies will influence the ECB's stance for months after Draghi leaves office. Thursday was his next-to-last meeting before his eight-year term ends on Oct. 31; Christine Lagarde, the outgoing head of the International Monetary Fund, is due to take his place and has endorsed Draghi's measures in hearings on her nomination.

The euro fell on the news of the stimulus to its lowest level against the dollar since May 2017, while stock markets in Europe rose. The currency was down 0.6% at $1.0940.

"This was a kitchen sink job" said Neil Wilson, chief markets analyst at Markets.com. "Mario Draghi has done pretty much everything he could do with this one and is leaving the door open for Christine Lagarde to cut further."

In a nod to the fact that central banks alone cannot save the economy, Draghi said it was "high time" for governments to get more involved in supporting the economy by spending on growth-friendly projects, among other things.

So far, such calls have been ignored in the eurozone's biggest country, Germany, which has insisted on balanced budgets despite pleas from the International Monetary Fund and others to spend more on infrastructure such as extending high-speed internet to all areas of the country.

Economic growth in the eurozone has slowed to 0.2% in the second quarter from the quarter before and Germany, the largest member of the euro, shrank by 0.1%, putting it on the verge of a recession, defined as two straight quarters of declining output.

While services firms and employment have held up relatively well, industrial firms have seen activity slump amid uncertainty about global trade. U.S. President Donald Trump has imposed higher tariffs on Chinese imports as he seeks a new trade deal, leading to Chinese retaliation and uncertainty among firms about where they should locate supply lines of parts and products. The IMF has lowered its forecast for growth in global trade this year by 0.9% to 2.5%.

Further uncertainty has been piled on by lack of clarity over whether Britain will leave the European Union on Oct. 31 with a divorce deal to smooth the movement of goods. Without an exit deal, new tariffs and border checks would suddenly be imposed, disrupting business dealings between major trade partners.

Like the Fed, the ECB has had to change its stimulus stance as the global economic outlook has darkened. The bank ended a previous bond purchase stimulus program only in December after buying 2.6 trillion euros ($2.9 trillion) in financial assets from banks. The bank kept those bond holdings by reinvesting the proceeds of expiring bonds, maintaining the level of stimulus. But deteriorating economic data pushed the bank to start planning more help for the economy.

Stimulus measures make borrowing cheaper, stimulating economic activity, assuming businesses see enough prospect of profit to be willing to risk borrowing. Low interest rates also tend to support the prices of financial assets such as stocks and bonds, helping to ward off market turmoil that could further undermine confidence.

"On both sides of the Atlantic, highly accommodative monetary policies limit the risk of financial turbulence," said Holger Schmieding, chief economist at Berenberg bank in London.

Stimulus measures also tend to weaken a currency, which can help a country's exporters — a fact Trump has tweeted about repeatedly as he pushed the Fed to cut rates below zero, like the ECB.

When asked about Trump's tweets, Draghi responded firmly: "We have a mandate: we pursue price stability, and we don't target exchange rates."

___

Pan Pylas contributed to this report.

AP Editorial Categories: 
Comments ()