Dec 4, 2014 7:55 AM

ECB rates unchanged, markets await stimulus hints

The Associated Press

FRANKFURT, Germany (AP) Investors are waiting to learn more about when the European Central Bank might launch large-scale corporate or government bond purchases to help the economy and bring inflation up from dangerous lows.

ECB President Mario Draghi will assess the state of the economy at a news conference following the bank's decision Thursday to leave its benchmark interest rate unchanged at a record low 0.05 percent.

The rate decision was a foregone conclusion. Bank officials have said the rate is now so close to zero they cannot reduce it further.

Instead, attention has focused on whether the ECB will start buying corporate or government bonds in an effort to boost growth and inflation in the 18 countries that use the euro currency. ECB officials have indicated they will decide in the first three months of 2015.

Large-scale bond purchases, known as quantitative easing, are a way of pushing newly created money into the economy in an effort to raise inflation and growth. Quantitative easing has been used by other central banks including the U.S. Federal Reserve.

The ECB is trying to raise the inflation rate, which is only 0.3 percent annually. Weak inflation is partly a result of recently lower oil prices. But it also reflects anemic demand for goods and services. The eurozone economy grew only 0.2 percent in the third quarter and unemployment is high at 11.5 percent. Growth has been dampened by government efforts in several member countries to restrain spending and raise taxes to reduce heavy debt loads. The currency union is still trying to work off a crisis over high government debt.

The central bank the chief monetary authority for the eurozone has already cut interest rates, its main tool in steering the economy, to reduce borrowing costs for companies.

Now that rate cuts have been exhausted, the ECB has moved on to so-called unconventional methods. Those have included long-term, cheap loans to banks in an attempt to encourage them to lend the money on. It has also started to purchase bonds made up of bank loans to companies, a step aimed at loosening credit further.

Yet the overall level of stimulus has remained the same, as new loans and bond purchases have been offset by banks repaying earlier cheap loans. That has left the ECB's balance sheet a broad measure of its efforts to stimulate the economy little changed at about 2 trillion euros. Draghi has indicated the ECB wants to add roughly 1 trillion euros in stimulus. That leads some analysts to think the bank will have to broaden its bond purchases to the larger market of government bonds to give a big enough push to the economy.

Some economists and members of the top ECB board have expressed doubt about whether buying government bonds would have much effect in the eurozone. The step is aimed at driving down bond market interest rates. Skeptics say those rates have already fallen so far that central bank purchases will have little effect. Another concern is that companies in Europe get most of their credit from banks, not by issuing bonds. That suggests lowering bond rates would not give businesses much of a break on interest costs.

It was the first rate decision and news conference at the bank's new skyscraper headquarters built over a former market hall in Frankfurt.


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