European Central Bank preparing to offer more stimulus, in case economy worsens

FRANKFURT – European Central Bank head Mario Draghi opened the door wider for further stimulus on Thursday, saying the bank is laying the technical groundwork for new measures that it could deploy if needed. Stocks rallied and the euro slumped on the news.

The ECB did not announce any new monetary support programs after its governing council meeting. It left its key interest rate at a record low of 0.05 per cent.

But Draghi jolted markets with his declaration that more measures were possible — and that the ECB’s governing council was behind him, dismissing media reports he was facing resistance.

The euro fell to around $1.24, the weakest level since August 2012, when Draghi famously promised to do “whatever it takes” to save the euro. Monetary stimulus can weigh on a currency. Germany’s main stock index jumped 1.4 per cent before edging back to a 0.7 per cent gain.

Draghi said the 24-member governing council has tasked staff “with ensuring the timely preparation of further measures to be implemented, if needed.”

Markets appeared to interpret that as a prelude to a program in which the central bank would create new money and use it to make large-scale purchases of government bonds from banks and financial institutions, as the U.S. Federal Reserve has done. Such a program, dubbed quantitative easing, or QE, can boost stocks, lower market interest rates and, eventually, help growth and company profits.

Draghi left open, however, exactly what new measures were under consideration. The ECB has discussed large-scale bond purchases in one way or another for months but held off. The question now is whether Draghi and the ECB will finally go ahead as eurozone economic indicators continue to disappoint.

Analyst Christian Schulz at Berenberg Bank saw a 60 per cent chance that the ECB would announce in December that it will purchase corporate bonds, not government bonds. That could have a stimulus effect while avoiding charges the ECB is bailing out indebted governments by buying their bonds.

Joerg Kraemer, chief economist at Commerzbank, expects the ECB to launch government bond purchases at the start of next year. “This will make virtually no change to low growth and low inflation, but will help highly indebted countries and their banks,” he wrote in a note to investors.

The ECB faces skepticism over government bond purchases in Germany, the eurozone’s largest and most influential member. Skeptics say such bond buying would just take pressure off governments that need to make their economies grow by cutting bureaucracy and making their labour markets more flexible.

And there is debate about how much good it would do. Unemployment has fallen steeply in the United States, but some economists question whether that is due to the bond buying.

By holding off new announcements on Thursday, the ECB also wanted to give steps it has already deployed a chance to work. This summer, it slashed its benchmark interest rate, offered cheap loans to banks, and started purchasing bonds backed by bank loans. All are steps aimed at easing credit to companies to encourage investment and growth.

The eurozone economy did not grow at all in the second quarter, and inflation is a mere 0.4 per cent, raising concerns the bloc may fall into deflation, a sustained drop in prices that can encourage consumers to put off spending.

Draghi said the council had examined the experience of other central banks including the Fed, Bank of Japan, and Bank of England, all of which have done large-scale bond purchases. He said that each economy was different and the effect depended on the local situation.

He added that other banks’ experiences “are very important in that they make us think how to make the most of the measures that we may be taking, if needed.”