ECB Opens Door to More Stimulus

Citing worries about China and developing markets, European Central Bank (ECB) head Mario Draghi says the bank will consider expanding its monetary stimulus at its next meeting in December.

The remarks open the door to expanding the 1.1 trillion euro ($1.2 trillion) stimulus program that is meant to raise inflation and boost the eurozone’s spotty economic recovery.

Draghi made it clear that the ECB was also considering other measures, such as further cutting some of its interest rates.

“We are ready to act if needed,” he said Thursday after a policy meeting in Malta.

He said the ECB’s governing council had “a very rich discussion” and was “open to a whole menu of monetary policy instruments.”

The euro fell sharply on the news, as more monetary stimulus or lower rates tend to weigh on a currency. The 19-country currency fell from above $1.1300 before Draghi’s comments to $1.1170, while stocks rose. Analysts had expected Draghi to hold out the possibility of more stimulus in order to keep a lid on the euro’s exchange rate.

But Thursday’s comments seemed to carry a stronger message that action was possible because Draghi specifically mentioned the bank’s Dec. 3 meeting.

He stressed that the exchange rate “is not a policy target,” but said the ECB could consider it because it affected inflation.

Maintaining stable prices, defined as inflation just under 2 percent, is the ECB’s key job. By last count, in September, the inflation rate was way too low at minus 0.1 percent annually. That’s a sign of weak demand. And low inflation — or outright falling prices — can make it harder for Europe’s over-indebted countries and companies to reduce their burdens. It can also slow eurozone countries’ efforts to reduce their business costs relative to other trading partners in the bloc.

The ECB has already cut its benchmark interest rate to a record low of 0.05 percent. The bank left it there, and has said that’s as low as it can go.

Draghi said, however, that one tool that was discussed Thursday was a potential further cut in the rate charged to banks to leave money on deposit at the central bank. The rate is already negative 0.2 percent. By cutting it further, it could push banks to not hoard money at the ECB but invest or lend it.

The ECB’s stance was not “wait and see,” he said, but “work and be ready.”

The eurozone economy grew by a quarterly rate of 0.4 percent in the April-June period but unemployment remains high at 11 percent.

Draghi said that eurozone demand seemed resilient but that trouble in emerging markets, particularly China, posed risks that could push the bank to act.

The ECB’s stimulus program entails buying bonds from banks with newly created money, in hopes they will expand credit. By in essence printing money to make the purchases, the ECB has increased the supply of euros available, which has pushed down its exchange rate.