European Central Bank expected to cut interest rates, expand bond-buying stimulus program

FRANKFURT – Markets are waiting for the European Central Bank to announce Thursday that it will unleash another round of monetary stimulus for the eurozone’s shaky economy.

The ECB could cut the interest rate on deposits by commercial banks, effectively encouraging them to lend more rather than hoard it. The rate is already minus 0.2 per cent, and analysts say it could be cut by another 0.10 percentage point or more.

ECB President Mario Draghi could also announce it is extending its 60 billion euros ($64 billion) per month in bond purchases made with newly created money beyond September 2016, or increase the amount purchased every month, or both.

The bond purchases are a way of increasing the amount of money in the economy, which in theory can make credit cheaper and raise inflation.

Low inflation is the chief reason the ECB wants to take action. The current annual rate of 0.1 per cent is well below the ECB’s goal of just under 2 per cent.

That’s a sign of weak demand in the economy. It makes it harder for indebted countries such as Greece to restore their finances. Weak inflation also makes it harder for eurozone countries in economic trouble to reduce their wages and other business costs relative to their trade partners, since near-zero average inflation means their wages and prices must fall — a politically painful prospect.

More stimulus also helps keep the euro’s exchange rate down, a boost to exporters and the economy of the 19 countries that use the euro. Currently, the euro trades at around $1.06 and some think it could go lower.

The weaker euro has been a key factor in supporting a modest economic recovery. The eurozone expanded 0.3 per cent in the third quarter, less than expected. But unemployment is falling and some economic indicators are pointing up.

Those trends were confirmed in a survey published Thursday by financial data company Markit, which shows activity across the eurozone manufacturing and services sector grew in November, though price gains remain subdued.