The Economy

ECB Balks at Immediate Stimulus for Sluggish Euro Zone

The European Central Bank cut growth and inflation forecasts for 2015 and 2016, saying it would reassess the need for policy measures early next year.
Matthew HellerDecember 4, 2014
ECB Balks at Immediate Stimulus for Sluggish Euro Zone

Despite a gloomy economic forecast, the European Central Bank is putting off until next year taking further action to revive the euro zone’s economy. The move disappointed financial markets that had been hoping for an immediate stimulus.

Recovery has stalled across many of the 18 countries in the euro zone, and ECB President Mario Draghi announced Thursday after a meeting of the bank’s central council that the bank had slashed its forecasts for growth and inflation over the next two years.

Inflation will be 0.7% on average next year and 1.3% in 2016, the bank’s economists predict, compared with an earlier forecast of 1.1% and 1.4%, respectively, while growth in the euro zone is projected to be 1% in 2015 and 1.5% in 2016, compared with an earlier forecast of 1.6% and 1.9%, respectively.

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Draghi reiterated his determination to launch a “quantitative easing” program of large-scale bond purchases as a stimulus measure if the euro zone continues its slide, the The New York Times reports, but refused to be pinned down on when it might begin, saying only that the bank would reassess the impact of its recent policy measures early in 2015.

“Technical preparations have been stepped up for further measures, which could be implemented in a timely manner, if needed,” he told reporters.

A U.S.-style government bond-buying scheme is seen as strongly supportive for the equity market and investors expressed disappointment at Draghi’s lack of specifics, with the Euro Stoxx 50-stock index falling about 1.8% Thursday.

“Investors were hoping for more substance on sovereign bond purchases, but Draghi hasn’t given investors anything that is really new,” John Smith, senior fund manager at Brown Shipley, told Reuters.

Nevertheless, Draghi also said he thought that QE would be an effective way to lift the inflation rate closer to the central bank’s target of about 2%, noting that it “has been shown to be effective in the United States and U.K.”

Last week, Germany’s appointee to the ECB’s executive board said now was not the time for state bond buying. But apparently sending a message to Germany, Draghi said unanimity was not required for the bank to proceed.