The Economy

European Central Bank May Expand Stimulus

The bank could step up its $1 trillion bond buying program with inflation still stubbornly below its 2% target.
Katie Kuehner-HebertNovember 20, 2015

While the U.S. Federal Reserve appears poised to tighten monetary policy, the European Central Bank may expand its stimulus program as it continues to grapple with the weak recovery in the eurozone.

The ECB’s $1 trillion bond buying program runs until at least September 2016, but inflation came in at just 0.1% in October  well below the bank’s 2% target.

At a conference Friday, ECB president Mario Draghi said the bank’s governing council would consider at its next meeting in December whether to take additional stimulus steps.

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“If we decide that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible,” he told the Frankfurt European Banking Congress. “That is what our price stability mandate requires of us.”

Options available to the ECB include stepping up the quantitative easing program, which depresses interest rates by injecting money into the financial system, and, more radically, pushing its official deposit rate even further into negative territory, from the current record low of -0.2%.

“Speculation on further easing has been growing since Draghi’s last press conference in October, when he expressed concern about fresh risks to the economy from the slowdown in China and other emerging markets,” Fortune said.

But another ECB governing council member, Bundesbank president Jens Weidmann, told the Frankfurt congress that he would take a more cautious approach to expanding the stimulus program. Current measures need time to work, he said, noting that weak inflation is largely due to low oil prices, which are a boost for the economy.

“”We need to be aware that the longer we stay in ultra-loose monetary policy mode, the less effective this policy will become and the more the attendant risks and side effects will come into play,” Weidmann warned.

According to Fortune, banks have resisted another cut in the ECB’s official deposit rate, claiming it effectively forces them to make losses.