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Business

Stronger Economy Lets ECB Kick Back, Let Stimulus Work

The ECB is already purchasing 80 billion euros ($89 billion) in government through at least March 2017 and some private-sector bonds in a program that began in March 2015

President of the European Central Bank Mario Draghi as he addresses the committee on economic and monetary affairs at the European parliament in Brussels, photo: AP/Geert Vanden Wijngaert
2 years ago

Europe’s economic recovery is finally showing signs it might be the real deal, after years of sluggishness and false starts.

And that means the European Central Bank likely won’t have to step up its ongoing 1.74 trillion-euro ($1.93 trillion) stimulus program when it meets this week.

Fear not — the chief monetary authority for the countries that use the euro will go on pumping newly printed money into the European economy in an effort to raise inflation. But that’s only due to measures that were already decided at previous meetings, and which are either still running or just now being implemented.

So analysts don’t expect any new stimulus jolts to be announced at Thursday’s meeting of the bank’s 25-member governing council in Vienna. There’s little sign that President Mario Draghi and Co. are ready to drop more stimulus news. Some economists are saying don’t expect anything more for the rest of this year, if at all.

The ECB is holding steady just as the U.S. Federal Reserve seems to be moving close to a rate increase at its June meeting. It moved rates up from near zero to 0.25 percent in December, but then held off any more increases amid unsettling swings in stock markets early this year. Global market and economic fears seem to have eased somewhat since then. The U.S. recovery is more advanced, so Fed chief Janet Yellen can contemplate withdrawing some stimulus.

There are two big factors that should let the ECB kick back for a few months at least.

First, the economy in the 19 countries that share the euro currency is finally showing signs of a more robust and lasting recovery after a miserable six years in which it was battered by global and local crises. The eurozone grew 0.5 percent in the first quarter from the quarter before. It finally regained the level of output it had in the first quarter of 2008, before the global financial crisis associated with the collapse of U.S. investment bank Lehman Brothers, and before a crisis over high debt in some countries that almost broke up the currency union. Figures published Monday showed that business and consumer optimism rose to a four-month high in May, while inflation expectations picked up across a range of businesses. Auto sales have risen for 32 straight months.

European Central Bank President Mario Draghi speaks during the Economy Day 2012 in Frankfurt, Germany November 7, 2012. REUTERS/Ralph Orlowski/File Photo

European Central Bank President Mario Draghi. Photo: Reuters/Ralph Orlowski, File

Second, oil prices have crept up, edging over $50 per barrel last week for the first time since July 2015. That should give the ECB a tiny bit of help by raising inflation. Economist Carsten Brzeski at ING-DiBa wrote in an email that “higher oil prices should lead to the first upward revision of the ECB’s staff inflation forecasts since … early 2015.” That was when the bank launched a major stimulus effort through bond purchases with newly printed money dubbed quantitative easing, or QE.

The last ECB projections in March foresaw only 0.1 percent inflation this year and 1.3 percent in 2017. That’s well below the bank’s goal of just under 2 percent, considered compatible with growth and jobs.

Meanwhile, June will see the implementation of two stimulus measures decided April 21. Those are the decision to purchase high-quality corporate bonds and to offer banks ultra-cheap long-term loans. Both steps are aimed at increasing lending, business and consumer spending, and, in theory, higher prices as demand for goods increases.

The ECB is already purchasing 80 billion euros ($89 billion) in government through at least March 2017 and some private-sector bonds in a program that began in March 2015. Those purchases hand banks money that didn’t exist before in return for their bonds. That’s something only a central bank — the legal issuer of the currency — can do and aims to boost lending and business activity.

Additionally, the ECB has cut its benchmark interest rate to zero. Banks that deposit funds for safety at the ECB are even charged a negative interest rate of 0.4 percent, a step aimed at pushing them to lend it instead.

Europe’s recent upturn, of course, faces risks that could knock it off track. That’s why Draghi will likely sound a bit gloomy. He doesn’t want anyone to think he’s about to turn off the tap.

With reason. For one, Britain votes June 23 on whether to leave the EU. A British exit, or Brexit, could shake Europe’s recovery.

“Of course, it remains to be seen if the May-April improvements in eurozone consumer and business confidence can be sustained or whether renewed falls occur,” says Howard Archer of IHS Global Insight.

“There are certainly a number of downside risks, including still appreciable global economic uncertainties, the possibility of the U.K. voting to leave the EU, and the danger of further terrorist attacks in Europe.”

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