FRANKFURT – European Central Bank head Mario Draghi cautioned Thursday that the crisis in Ukraine could weigh on the fragile economic recovery in the 18-country eurozone — but gave little sign the bank was so alarmed it was ready to deploy new stimulus measures.
Speaking after the bank kept its main interest rate on hold at the record low of 0.15 per cent, Draghi said the bank will “closely monitor” the possible repercussions of “geopolitical risks” on the recovery.
The possibility of an escalation in Ukraine as well as a ratcheting up in tensions between the West and Russia has cast a shadow over the eurozone’s fragile upswing.
Draghi warned that overall risks to the eurozone’s recovery are “to the downside” and that “geopolitical developments” were one of them.
Draghi said geopolitical risks are higher than they were a few months ago, and noted that “some of them — like the situation in Ukraine and Russia — will have a greater impact on the euro area than they certainly have on other parts of the world.”
At first glance, Draghi said the interconnections between the eurozone and Russian economies were rather limited in terms of trade and financial flows. And in terms of major financial institutions, there were “less than a handful of names” seriously exposed.
However it was hard to tell how much added impact would come “once sanctions on one side and counter sanctions on the other side are going to be undertaken.”
The EU and the United States imposed targeted sanctions on Russian officials and some banks and companies over what they say is Moscow’s support for armed pro-Russian separatists; Russia has responded by banning most agricultural and food imports from the West and has threatened to close its skies to overflight by airlines.
Draghi said early analysis has focused on higher energy prices as a potential risk for Europe. He also mentioned fighting farther away in Iraq, Gaza, Syria and Libya as sources of risk to the eurozone.
As well as keeping interest rates on hold, the ECB held off from announcing other stimulus measures to boost the recovery.
Draghi called the recovery “weak, fragile and uneven” and that the recent economic data suggested a “slowing down in the growth momentum.” Italy for instance has slipped into recession as its economy shrank 0.2 per cent in the second quarter, its second straight quarterly decline.
The ECB announced a big package of stimulus measures in June and is waiting to see how those work before doing more. That included a cut in the benchmark interest rate to a record low of 0.15 per cent. That’s the rate at which the ECB loans to banks; a lower rate means banks can in theory pass that on to borrowers.
Draghi underlined that the bank’s 24-member governing council was ready to add new unconventional stimulus members if the economy takes a turn for the worse.
That could include large-scale purchases of financial assets such as government bonds, or quantitative easing. That can drive down longer term market borrowing costs and add newly created money to the economy. Quantitative easing has been used by the United States, Britain and Japan. But the step is more complicated in a currency union of 18 countries and analysts think the ECB will keep it in reserve and use it only if the economy takes a serious turn for the worse.
Analyst Howard Archer at IHS Global Insight said the ECB was in standby mode.
“We still think the bar is high for large scale, full blown quantitative easing by the ECB,” he said. “But it is looking more possible that the bar could be reached if prolonged heightened geopolitical tensions cause already weak eurozone economic activity to stutter further.”