Monday, August 11, 2014

euro zone's weak and uneven economic recovery

German Logo of the ECB.
German Logo of the ECB. (Photo credit: Wikipedia)
The Ukraine crisis has heightened risks to the euro zone's weak and uneven economic recovery, and a tit-for-tat sanctions war could compound the problem, the European Central Bank said on Thursday as it held borrowing rates at record low levels.
ECB President Mario Draghi cited instability across the Middle East as well as tensions between Russia and Western countries over the conflict in Ukraine among factors weighing on growth in the single currency area. Moscow has retaliated for European Union sanctions by halting imports of food from Europe.
At a news conference after the bank's monthly policy-setting meeting, he stressed the ECB was ready to resort to quantitative easing - printing money to buy securities - if the outlook for inflation fell further. But he brushed off July's 0.4 percent reading, the lowest in more than four years, as a glitch due to temporary energy and food price falls.
"Geopolitical risks are heightened, are higher than they were a few months ago. And some of them, like the situation in Ukraine and Russia will have a greater impact on the euro area than they ... have on other parts of the world," Draghi said.
Having cut interest rates to record lows in June, the euro zone's central bank kept them steady, waiting to see whether schemes such as the ultra-cheap four-year loans to banks it will launch in September will prompt them to lend more.
The decision by the ECB's Governing Council, with representatives from the 18 countries that use the euro, had been expected by economists.
Many are now shifting their attention to next year, when they hope the ECB will follow the United States and other major central banks in launching a quantitative easing program.
Draghi explicitly mentioned that option along with the possibility of buying asset-backed securities (ABS), despite the stated reluctance of Germany's influential Bundesbank.
"I can only reaffirm that the Governing Council is unanimous in its commitment to also use unconventional measures like ABS purchases, like QE, if our medium-term outlook for inflation were to change," the ECB chief said.

The ECB expected strong take-up for next month's flood of cheap money for banks to lend to businesses, he said, adding that real interest rates in the euro zone would remain negative for far longer - up to five years - than in the United States.
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