The News
The News
Sunday 25 of October 2020

European Central Bank acts to help weakening economy

AP Photo,Dark clouds hang over the city with its bank buildings in Frankfurt, Germany, on a windy Thursday morning, March 7, 2019. (AP Photo/Michael Probst)
AP Photo,Dark clouds hang over the city with its bank buildings in Frankfurt, Germany, on a windy Thursday morning, March 7, 2019. (AP Photo/Michael Probst)

FRANKFURT, Germany (AP) — The European Central Bank took unexpectedly quick action on Thursday to support a slowing economy, joining the U.S Federal Reserve and Chinese leadership in their attempts to counter worries about global growth.

The central bank for the 19 countries that use the euro pushed back the date by which it might start raising interest rates. It said rates would not rise before next year — previously, it had said not before the fall.

It also said it would offer a new series of ultra-cheap loans to banks, supporting their ability to keep lending to businesses.

The moves appear to signal concern that the weakness in economic growth could be more than a blip and threatens to turn into a more lasting downturn. A trade war between the U.S. and China, the world’s largest economies, has hurt international commerce and manufacturing. And Britain’s exit from the European Union could further damage business activity.

Amid doubts about the extent of the economy’s slowdown, President Mario Draghi said, it was important to take action.

“In a dark room you move with tiny steps. You don’t run, but you do move,” he told a news conference at the bank’s headquarters in Frankfurt. “You try to be proactive rather than reactive.”

The U.S. Federal Reserve has already adjusted the course of its monetary policy. It has signaled a pause in its rate increases and said it’s ready to slow the reduction of bond holdings purchased under earlier stimulus efforts.

Chinese authorities, faced with a long-running cool-off in the country’s high growth, are also offering support to business, including a cut of up to 1.3 trillion yuan ($200 billion) in value-added and other taxes.

Carsten Brzeski, chief economist at the bank ING Germany, said that the timing of the ECB’s measures was earlier than expected.

“It is clearly an attempt to stay ahead of the curve,” he said.

Investors seemed to appreciate the approach, pushing up global stock markets. European indexes and Wall Street futures recovered earlier losses to trade higher. The euro fell 0.4 percent to $1.2666 as lower rates tend to weigh on a currency.

The ECB’s actions highlight how quickly the fortunes of the European and global economy have shifted. The bank on Thursday slashed its forecast for eurozone economic growth this year to 1.1 percent from 1.7 percent previously. Inflation is expected at 1.2 percent, down from a 1.6 percent forecast earlier and well below the bank’s goal of just under 2 percent.

Only in December, the ECB was confident enough to end almost four years of stimulus through monthly bond purchases amounting to 2.6 trillion euros (2.9 trillion). The purchases were a way of pushing newly created money into the economy to raise inflation from dangerously weak levels and support a recovery from the Great Recession and a crisis over too much debt in the eurozone.

Yet even as the bank was bringing that stimulus effort to an end, economic signals began to weaken. The eurozone has decent domestic demand but has suffered from weaker global trade.

The outlook is uncertain due to the possibility of a chaotic British exit from the European Union without a negotiated transition agreement, and the chance that U.S. -China trade talks will not reach a deal that would remove the possibility of further tariffs that would weigh on global trade. U.S. President Donald Trump has threatened tariffs on auto imports that would hit European automakers, but has held off for now.

The 19 country eurozone economy grew 0.2 percent in the fourth quarter of last year, down from 0.4 percent in the first two quarters.

The ECB meanwhile kept on hold its key interest rates. Those are at zero for lending to banks and at minus 0.4 percent rate on deposits from commercial banks.