Nov 6, 2014 2:44 AM
Despite fragile economy, ECB to sit tight
The Associated Press
FRANKFURT, Germany (AP) Despite the eurozone economy's sluggishness, the European Central Bank is likely to refrain from offering more monetary support at its meeting Thursday as it looks to existing stimulus programs to start working.
The ECB's 24 policymakers are expected to leave the key interest rate at a record low of 0.05 percent and signal no step-up in the current stimulus programs, which aim to boost the flow of credit to companies.
Analysts think ECB President Mario Draghi will use his news conference after the meeting in Frankfurt to underline the bank's willingness to intensify its stimulus efforts if things get worse. But on the whole, they say it will take a big drop in the economy for that to happen.
The ECB is worried about a combination of weak growth and low inflation, but it has already used up many of the policy tools at its disposal.
It has cut its benchmark interest rate its typical tool for steering the economy about as far as it can go. That in theory lowers borrowing costs for households and for businesses. The ECB is also offering ultra-cheap loans to banks, on condition they lend more to companies. And it has started buying bundles of bank loans, a step it hopes will also encourage more lending.
The more activist monetary policy pursued by the ECB in recent months is intended to help the eurozone recover after a debt crisis that has led governments to cut spending and raise taxes.
Yet the eurozone saw no growth in the second quarter and few economists think figures for the July-September period will be much better when they are released on Nov. 14.
The biggest weapon the ECB has left to use would be a monetary stimulus through massive bond purchases, called quantitative easing or QE, similar to the ones the U.S. Federal Reserve ended last week. The Bank of Japan last week stepped up its own purchases.
But the practice, which involves creating new euros and pumping them into the economy, is meeting with resistance in some quarters. QE is not as easy a call in Europe as it was in Japan and the U.S.
For one, it's more complicated to buy government bonds in an 18-country currency union. It also faces opposition among many officials and economists in Germany, the eurozone's dominant political and economic force. One reason is that QE could ease pressure on governments in weaker countries to reduce burdensome bureaucracy and excessive worker protections and make their economies more business friendly and encourage growth.
Skeptics include Jens Weidmann, the head of Germany's Bundesbank central bank and a member of the ECB's rate-setting council.
"Political hurdles to sovereign QE remain significant," said Frederik Ducrozet, eurozone economist at Credit Agricole.
Pylas contributed from London.