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Tuesday, March 19, 2024
March 19, 2024

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Stronger economy allows European Central Bank to relax

It’s unlikely agency will have to step up stimulus program

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FRANKFURT, Germany — Europe’s economy is finally showing signs of increasing strength, after years of sluggishness and false starts.

And that means the European Central Bank likely won’t have to step up its ongoing 1.74 trillion-euro ($1.93 trillion) stimulus program when it meets this week.

Fear not — the chief monetary authority for the countries that use the euro will go on pumping newly printed money into the European economy in an effort to raise inflation. But that’s only due to measures that were decided at previous meetings, and which are either still running or just now being implemented.

So analysts don’t expect any new stimulus jolts to be announced at Thursday’s meeting of the bank’s 25-member governing council in Vienna. There’s little sign that President Mario Draghi and Co. are ready to drop more stimulus news. Some economists are saying don’t expect anything more for the rest of this year, if at all.

Holding steady

The ECB is holding steady just as the U.S. Federal Reserve seems to be moving close to a rate increase at its June meeting. It hiked its key rate in December from near zero to a range between 0.25 percent and 0.5 percent, but then held off any more increases amid unsettling swings in stock markets. Global jitters seem to have eased since then. The U.S. recovery is more advanced, so Fed chief Janet Yellen can contemplate withdrawing some stimulus.

Inflation is still way too low, at minus 0.2 percent, and unemployment is painfully high at 10.2 percent. But there are two big factors that should let the ECB kick back for a few months at least.

First, the economy in the 19 countries that share the euro currency is finally showing signs of a somewhat more robust and lasting recovery after a miserable six years in which it was battered by global and local crises. The eurozone grew 0.5 percent in the first quarter from the quarter before. It finally regained the level of output it had in the first quarter of 2008, before the global financial crisis associated with the collapse of U.S. investment bank Lehman Brothers, and before a crisis over high debt in some countries that almost broke up the currency union. Figures published Monday showed that business and consumer optimism rose to a four-month high in May, while inflation expectations picked up across a range of businesses. Auto sales have risen for 32 straight months.

Oil prices creep up

Second, oil prices have crept up, edging over $50 per barrel last week for the first time since July 2015. That should give the ECB a tiny bit of help by raising inflation. Economist Carsten Brzeski at ING-DiBa wrote in an email that “higher oil prices should lead to the first upward revision of the ECB’s staff inflation forecasts since … early 2015.”

The last ECB projections in March foresaw only 0.1 percent inflation this year and 1.3 percent in 2017. That’s well below the bank’s goal of just under 2 percent, considered compatible with growth and jobs.

Meanwhile, June will see the implementation of two stimulus measures decided April 21. Those are the decision to purchase high-quality corporate bonds and to offer banks ultra-cheap long-term loans. Both steps are aimed at increasing lending, business and consumer spending, and, in theory, higher prices as demand for goods increases.

The ECB is already purchasing 80 billion euros ($89 billion) in government through at least March 2017 and some private-sector bonds in a program that began in March 2015. Additionally, the ECB has cut its benchmark interest rate to zero. Banks that deposit funds for safety at the ECB are even charged a negative interest rate of 0.4 percent, a step aimed at pushing them to lend it instead.

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