The European Central Bank will judge early next year whether it needs to take more action to revive the eurozone economy, president Mario Draghi said yesterday.
The ECB’s Governing Council was unanimous in its willingness to launch measures such as a government bond buying programme with new money if necessary, Draghi told a news conference after the ECB kept borrowing costs at a record low.
The eurozone’s central bank has set itself a goal of expanding its balance sheet – buying assets from banks and others in return for cash in the hope it will be pushed into the economy – by up to €800 billion or even €1 trillion back to early 2012 levels.
With interest rates essentially at zero that has become the policy target.
“Early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments,” Draghi said.
“Should it become necessary to further address risks of too prolonged a period of low inflation ... this would imply altering early next year the size, pace and composition of our measures.”
Technical preparations for such a move were being stepped up, he said.
In the meantime, it will gauge the impact of ultra-low interest rates, cheap loans given to banks and buying of repackaged loans in an attempt to kick-start lending.
New forecasts by ECB staff sharply downgraded the eurozone’s growth outlook for next year to 1.0 per cent from the 1.6 per cent predicted in September.
Inflation is seen at just 0.7 per cent in 2015, down from a September forecast of 1.1 per cent and way below the ECB’s target of close to but below 2 per cent.
“The risks surrounding the economic outlook for the euro area are on the downside,” Draghi told reporters in the ECB’s new €1.3 billion headquarters, an imposing Frankfurt skyscraper designed to show the strength of the currency.
Draghi said particular attention would be paid to the oil price which has tumbled nearly 40 per cent in the second half of the year. “We won’t tolerate prolonged deviations from price stability,” he said.
ECB vice president Vitor Constancio had previously said the bank would be better able to gauge in the first quarter of next year whether it needs to take the ultimate policy step into quantitative easing.
Mounting concerns about the euro zone economy were underlined by the US Federal Reserve’s influential vice chairman, Stanley Fischer, who said money-printing would help Europe as it had the US.
“If the ECB moves in that direction, it will have positive effects,” Fischer, who was Draghi’s academic mentor at university, told a newspaper in Italy.
Draghi faces considerable political obstacles to taking this step, chiefly from a reluctant Germany. Last week, Sabine Lautenschlaeger, Germany’s appointee to the ECB’s Executive Board, said now was not the time for state bond buying.
But he said there was no need for unanimity within the ECB to launch money-printing quantitative easing, or QE.
Other major central banks including the Fed, Bank of Japan and Bank of England, have already used QE to stimulate their economies.
Germany, the bloc’s biggest economy by far and its most influential, fears it would encourage reckless borrowing and fuel inflation in future.
“The eurozone needs growth and jobs to ensure that it survives,” said Lena Komileva of consultancy G+ Economics.
“Germany’s strong opposition ... raises questions about its ability to act fast enough.”
Eurozone inflation slowed to just 0.3 per cent 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.
At yesterday’s meeting, the ECB left its main refinancing rate at 0.05 per cent and the rate on bank overnight deposits at -0.20 per cent, which means banks pay to park funds at the central bank.