European Central Bank signals possible rate cut
BY The Canadian Press | July 25, 2019
The European Central Bank joined the U.S. Federal Reserve in saying that more stimulus could be coming soon to support an economy weakening in the face of global tensions over trade.
The ECB said Thursday after a policy meeting that it could cut interest rates as its next move and was studying ways to restart its bond-buying stimulus in coming weeks.
The bank changed its policy statement by saying that rates will remain at current record lows “or lower” through the middle of 2020. Adding the words “or lower” emphasizes that the next move could be down.
The bank also tasked its staff to study a possible new round of bond purchases, which add newly created money into the economy in the hope of stimulating borrowing and economic activity. The monetary authority for the 19 countries that use the euro added new language that monetary policy had to remain supportive “for a prolonged period of time.”
The central bank halted a 2.6 trillion-euro bond-buying program only at the end of last year, saying inflation was headed sustainably toward its goal of just under two per cent. But indicators have become weak as the U.S.-China trade conflict weighs on the world economy, including that of the 19 countries that use the euro.
The U.S. and China have imposed import taxes on hundreds of billions of dollars-worth of traded goods. U.S. President Donald Trump has warned that more tariffs could be coming if he cannot reach a trade deal with China to reduce the U.S. trade deficit. Trump has also threatened to put tariffs on Europe’s big automotive industry.
Mario Draghi and International Monetary Fund head Christine Lagarde, who has been nominated to replace him Nov.1 when his term expires, say that such trade protectionism is a key risk to the global economy. Officials at the Fed have signalled that they could cut interest rates at their July 30-31 meeting.
Among the key concerns for the ECB is that annual inflation is just 1.3 per cent as of June, well below the goal. Persistently low inflation can be a sign of economic weakness and can make it harder for indebted governments and consumers to reduce their debt burden.
It remains an open question how much more stimulus the ECB would get from a rate cut or bond purchases since rates are already low and the 2.6 billion euros in added stimulus has not been withdrawn from the financial system. Almost four years of bond purchases left the ECB still struggling to consistently reach the inflation target.
Central policies have a wide-ranging impact on companies, governments and individuals. A return to more stimulus means cheaper borrowing for companies and governments, which can support business activity and take pressure off government budgets. It can mean paltry returns, however, for savers while boosting stock prices, at least in the short turn, by pushing people out of lower-yielding, safer investments into riskier ones.
Some experts also worry that having low rates for extended periods of time can over-inflate asset prices, leading to sharp drops later, while some economists think low rates can end up steering investment into less productive areas and companies.