Jan 21, 2016 12:09 AM
Markets await hints on more European Central Bank stimulus
The Associated Press
FRANKFURT, Germany (AP) Markets are waiting to hear what European Central Bank head Mario Draghi has to say about on growth worries in China, scary low oil prices and the chance of more stimulus in Europe.
Draghi will speak Thursday after the bank's 25-member governing council meets to decide monetary policy.
Analysts are betting that the bank won't add stimulus at the meeting and will wait at least until the next meeting in March, if then. Instead, expectations are that Draghi will verbally underline a willingness to step in down the road if plunging oil prices and stocks are seen to be hurting the bank's effort to push inflation in the 19-nation eurozone higher.
The bank increased its stimulus measures Dec. 3. But since that meeting, oil has fallen steeply from around $45 per barrel to around $28 per barrel. That threatens to push inflation in the eurozone into negative territory, from an already low 0.2 percent in December.
The current level of annual price increases is far from the bank's goal of just under 2 percent, a level considered healthier for the economy. Low inflation can hurt growth if it becomes entrenched.
One reason to hold off Thursday is that the real economy where people produce and purchase goods is holding up fairly well. Indexes of consumer and business confidence are pointing up. Unemployment is creeping down, at 10.5 percent.
The open question is, whether recently plunging stock markets or low oil prices will carry over from those markets to broader economic activity. The depth of China's slowdown is another question mark to watch.
Central bank stimulus can have far-reaching effects on businesses, investors, savers and consumers. The ECB stimulus has meant a stronger dollar against the euro, adding a headwind for U.S. exporters to Europe. It has also slashed returns on savings in conservative investments such as bonds, insurance policies and bank accounts for people looking ahead to retirement.
Stimulus can, however, boost stocks by reducing returns on other investments such as bonds to zero or even below.
Low inflation means more stimulus remains on the table for the ECB. That's in contrast with the U.S. Federal Reserve, which in December raised interest rates after seven years of having them near zero. The ECB's benchmark rate is 0.05 percent.
At its last meeting December 3, the governing council expanded an existing stimulus program based on 60 billion ($66 billion) in monthly purchases of government and low-risk private sector bonds by extending the purchases for another six months through March 2017. The purchases are made with newly created money, so they increase the amount of money in the financial system and in theory should boost inflation and also lending to support business.
The council also cut the interest rate on deposits at the central bank from commercial banks by 0.10 percentage points to negative 0.30 percent. The idea is to make banks pay for leaving money unused and push them to lend it instead.
That amount of news stimulus disappointed market participants who had expected more. A summary of the meeting released last week showed some members wanted more stimulus and others wanted none at all divisions that Draghi will have to bridge to get the board broadly behind any new effort to help the economy with monetary policy.