European Central Bank to detail stimulus plan
NAPLES, Italy (AP) — European Central Bank head Mario Draghi is expected Thursday to underline the bank's willingness to deploy more economic stimulus measures, a stance that could send the euro skidding even lower.
And a drop in the currency — which helps eurozone exporters and could nudge up worryingly low inflation — might be the most effective stimulus to come out of the ECB's monthly meeting.
While the eurozone's chief monetary authority is faced with weak economic indicators, particularly a record low inflation rate, it is unlikely to take any more drastic action on Thursday, having already cut interest rates and unveiled two stimulus programs since June.
Rate cuts are practically impossible. The benchmark refinancing rate is already at a record low at just 0.05 percent, while the rate it pays on bank deposits is minus 0.2 percent. Draghi has admitted the bank is, practically speaking, zeroed out on rates.
And analysts say the ECB is unlikely to announce new stimulus measures as it is still rolling out two earlier programs unveiled in June and September.
Those programs seek to help economic activity by boosting the availability of credit. One offers long-term cheap loans to banks, on condition they lend money on to companies. The second is a plan to buy bonds made up of bundles of loans to companies — called ABS — in hopes of boosting demand for such bank loans.
Draghi is expected to give more detail on the second plan at a press conference Thursday.
Perhaps more importantly, he is also likely to underline the bank's willingness to do more if needed. That could include expanding the program of bond purchases to other kinds of assets, even government bonds. Large scale purchases of government bonds — called quantitative easing, or QE — is what the Federal Reserve did to help the U.S. economy. But experts are not sure it would be as useful in the eurozone.
Some say the ECB will avoid doing QE in coming months because it is complicated in an 18-country currency union. The mere possibility of QE, however, has helped drive down interest rates and the euro. Lower rates can drive down a country's currency. Not only that, the Fed is now talking about when to raise rates, boosting the dollar from their end.
The drop in the euro's exchange rate — to around $1.26 from $1.39 in May — is coming as a relief to many. It makes it easier for exporters to sell goods abroad and it helps raise the rate of inflation, which is worryingly low at only an annual 0.3 percent.
Analysts at Swiss bank UBS said the euro could drop further if Draghi can make it clear that the ECB is willing to do more "and keeps the broader QE threat alive."
Thursday's meeting is being held in Naples, Italy, one of two meetings a year held away from the bank's Frankfurt headquarters to underline its status as a pan-European institution.
McHugh contributed from Frankfurt, Germany.