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ECB Ready to Help Eurozone

ECB Ready to Help EurozoneECB Ready to Help Eurozone

The European Central Bank says it’s ready to give the eurozone a further dose of stimulus if Britain’s vote to leave the European Union starts to weigh on the region’s economy.

But its president, Mario Draghi, stressed Thursday that the bank would need more time to monitor the situation and refrained from any clearer indications of what would push its hand, AP reported.

Britain’s unprecedented vote to leave the EU could hurt trade in the region and weigh on business confidence as it could take years to establish new trade relations. While it’s still early to tell what the full effect of the vote will be, many businesses in Europe are expressing concern.

At its first meeting since the June 23 vote, the ECB decided to leave its key interest rates on hold at record lows. But at a subsequent news conference, Draghi said the central bank had the “readiness, willingness, ability” to help the eurozone economy.

Analysts say the ECB could opt later this year—in the fall or winter—to extend its bond-buying stimulus program past its expiry date of March 2017.

   Bond-Buying

Under the program, the ECB currently buys €80 billion ($88 billion) in bonds a month. The step pumps newly created money into the banking system. The hope is that it will increase lending and raise inflation to levels more consistent with steady growth.

That program is ongoing and was stepped up as recently as March, meaning the ECB has not yet had a chance to see the full impact of the stimulus.

Beyond the bond-buying, the central bank has lowered its benchmark interest rate for lending to banks is zero. And it has imposed a negative rate on deposits left with it by commercial banks of 0.4%, a penalty intended to push them to lend the money.

Europe is enjoying a modest economic recovery but inflation of 0.1% is abnormally low and unemployment is falling too slowly to make people in countries such as Spain and Greece feel good about the economy.

Analyst Carsten Brzeski at ING-Diba wrote in a research note that Draghi “did not give any hint on possible ECB’s next steps... More action in September is possible, though not a done deal yet.”

Draghi spoke cautiously also on the discussion swirling around Italy’s troubled banks. Prime Minister Matteo Renzi has raised the possibility of using government money to bail them out, which risks a clash with new EU rules limiting the extent to which troubled banks can dip into taxpayers’ pockets.

 

Financialtribune.com