FRANKFURT – The latest on the European economy as the European Central Bank meets to discuss its monetary policy (all times local):
European Central Bank President Mario Draghi has dismissed the idea that central banks in developed economies should lower their inflation targets amid a prolonged period of subdued price increases.
Inflation has been low in the eurozone for months and is only 0.2 per cent annually, far below the official aim of just under 2 per cent. It’s also low in other major economies like the U.S. and Japan.
The low inflation is partly due to a drop in oil prices in the past year, but also to weak demand from consumers.
At a news conference, Draghi said that global central banks like the ECB cannot shift their targets to account for temporary factors in the economy.
He said: “It will test our credibility if we were to change our target, when it’s taking more effort to achieve that target.”
He added that “there hasn’t been any discussion of changing the target on inflation.”
The euro fell sharply and stocks rose after European Central Bank President Mario Draghi said the bank was ready to provide more stimulus if needed.
Following the ECB’s decision to keep interest rates on hold, Draghi said the bank can adjust its monetary stimulus. The bank started its 1.1 trillion euro ($1.2 trillion) government bond-buying program this year. It’s due to end next September. The assets purchases can run for longer “if necessary,” Draghi said.
The stimulus is intended to help get consumer price inflation back toward the ECB’s target of just below 2 per cent. In the year to August, it stood at 0.2 per cent. Draghi said it could go negative in coming months following recent oil price falls.
The hint at further stimulus, which would inject more euros in the financial system, weighed on the currency. In the wake of Draghi’s comment, the euro fell 0.9 per cent to $1.1119, while European stock markets added to earlier gains with the Stoxx 50 index of leading shares up 1.9 per cent.
The European Central Bank has cut its projections for inflation and economic growth in the 19 countries that share the euro currency.
The bank trimmed its outlook for annual price increases this year to 0.1 per cent from 0.3 per cent previously, and for next year to 1.1 per cent from 1.5 per cent.
Inflation figures are important for the bank’s conduct of its 1.1 trillion euro ($1.2 billion) program to stimulate the eurozone economy. The bank is trying to raise weak inflation from an annual 0.2 per cent toward its goal of just under 2 per cent. It is doing that by printing money and pushing it into the economy through monthly purchases of government and corporate bonds.
The ECB has also trimmed its growth forecasts for the eurozone due to a slowdown in developing economies. It trimmed its forecast for this year to 1.4 per cent from 1.5 per cent previously and next year’s to 1.7 per cent from 1.9 per cent.
European Central Bank President Mario Draghi is emphasizing the bank’s willingness to add to its 1.1 trillion ($1.2 trillion) stimulus program to boost low inflation or help the economy, if needed.
The ECB is pumping 60 billion euros a month in newly printed money into the economy through purchases of government and selected corporate bonds.
The program is slated to run at least through Sept. 2016.
But Draghi said Thursday at his regular news conference that the ECB can adjust the “size, composition and duration” of the program if needed.
Draghi has said the stimulus program would “in any case” continue until inflation turns up convincingly toward the bank’s goal of just under 2 per cent. Inflation is now only 0.2 per cent, a sign of weak demand and a slower than expected global economy.
The European Central Bank has left its benchmark interest rate unchanged at a record low of 0.05 per cent.
The rate decision was expected because the bank has said the current rate is as close to zero as it can get. The benchmark determines the cost of ECB credit for private-sector banks, and through them steers interest rates for businesses and consumers.
Markets are now waiting for ECB head Mario Draghi to speak at a news conference. He’s expected to address fears about the impact of an economic slowdown in China on Europe.
Analysts say Draghi may underline the bank’s willingness to extend a 1.1 trillion euro ($1.2 billion) stimulus program that is slated to run at least through September, 2016.
While reports suggested that the eurozone economy regained momentum during August, there were signs that British growth may be easing.
The Chartered Institute for Procurement and Supply said its purchasing managers’ index — a broad gauge of business activity — fell to a two-year low of 55.1 points in August from 56.6 the previous month. Though anything above 50 indicates expansion, the survey adds to evidence suggesting the British economy is coming off the boil.
The U.K., which is not part of the euro, has been one of the standout performers in Europe over the past year and there are growing expectations that the Bank of England could soon raise interest rates — a stance that contrasts with that of the European Central Bank, which sets policy for the 19 countries that share the euro.
Retail sales across the 19-country eurozone rose by a solid 0.4 per cent in July from the month before.
The increase reported by the European Union’s statistics agency, Eurostat, was more or less in line with market expectations and more than made up for the 0.2 per cent decline recorded in June.
The July figures also provide further evidence that the eurozone economy held up during a month when fears of a Greek exit from the euro were at their most acute.
Consumer confidence appeared to be particularly buoyant in Germany, Europe’s biggest economy, where retail sales spiked by 1.4 per cent during the month. There were no figures available for Greece, which has been struggling with strict controls on money flows, such as limits on daily withdrawals at ATMs, since the end of June.
European stocks are up as investors expect European Central Bank President Mario Draghi to indicate later that the bank stands ready to provide the eurozone economy with more stimulus if inflation doesn’t pick up.
With oil prices at multiyear lows, the ECB is expected to reduce inflation forecasts. Though the eurozone’s annual inflation rate has edged back above zero in recent months, some analysts say it could fall again.
Lower prices can weigh on economic activity if individuals or firms delay spending in anticipation of better deals down the line.
The Stoxx 50 index of leading European shares was up 1.5 per cent, while the euro was steady at $1.1230.
Lee Hardman, an analyst at Bank of Tokyo-Mitsubishi UFJ, thinks the bank “is likely to display a more dovish policy tone signalling that downside risks to price stability have increased and reiterating that they stand ready to act if required.”
Waning concerns over a Greek exit from the euro appear to be shoring up the economic recovery across the 19-country eurozone despite renewed uncertainty over the global economy, according to a closely-watched survey.
Financial information company Markit says its monthly composite purchasing managers’ index — a gauge of economic activity — rose to a four-year high of 54.3 points in August from 53.9 the previous month. The increase was also larger than the initial estimate for a more modest rise to 54.1. Anything above 50 indicates expansion.
Chris Williamson, Markit’s chief economist, said the calming of so-called Grexit fears “has led to an improvement in the business environment across the eurozone.”
Williamson said the indicator suggests that the eurozone is growing at a quarterly tick of 0.4 per cent in the third quarter.