Tags: Europe | ECB | Fed | Exit

ECB Seeks New Tools While Fed Toys With Exit

Thursday, 23 May 2013 08:04 AM

 

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The European Central Bank is looking into expanding its range of policy tools, while the U.S. central bank is mulling scaling back its support measures, highlighting the contrasting fortunes between the world's two biggest economic blocs.

ECB Executive Board member Peter Praet said late on Wednesday that the central bank could try new policies if needed to battle deflation risks, adding that the central bank was also weighing measures to encourage more lending in the eurozone.

Firms and consumers in the 17-country bloc face widely varying loan costs, with crisis-ravaged southern European countries inflicted with high interest rates despite record-low policy rates set by the ECB — a major headache for the central bank.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Praet said deleveraging by the region's banks could hurt growth and push eurozone inflation too low — it has already dropped to 1.2 percent, well below the target of close to but below two percent — and that the ECB would move to avoid a deflationary spiral if necessary.

"We have an objective: price stability," he said. "If that objective is at risk, we have the possibility ... to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said.

While deflation, or persistently falling prices, remains outside the ECB's mainline scenario, Praet's comments indicate it is taking the risk seriously.

His fellow policymaker, Governing Council member Christian Noyer, also said the ECB was considering new measures to tackle differences in financing conditions across the eurozone.

"We are currently considering the possible introduction of additional monetary instruments that could further reduce financial fragmentation," Noyer told a conference in Paris on Thursday.

In contrast, U.S. Federal Reserve Chairman Ben Bernanke said the Fed could decide to scale back the $85 billion in bonds it buys each month at one of its "next few meetings" if the economy maintained momentum.

Monetary stimulus was helping the economy recover, Bernanke told Congress on Wednesday, but added that the central bank needs to see further signs of traction before taking its foot off the gas pedal.

TIGHT LENDING

The U.S. economy regained speed in the first part of the year while the eurozone languished in recession for the sixth straight quarter, and business surveys indicated on Thursday that the April-June period could make it seven as weakness spreads to the core countries, especially France.

With the eurozone stuck in recession, the ECB cut its main refinancing rate to a record low of 0.5 percent this month and extended its provision of unlimited funds to banks by a year.

While Praet and Noyer declined to elaborate on what type of instruments might be considered, analysts think the ECB might allow banks to borrow more against the same amount of collateral, which in turn could help them lend more.

"(The comments were) one of the clearest indications yet that the ECB is studying reductions in valuation haircuts," Citi analyst Guillaume Menuet said in a research note.

Another eurozone central banker, Austria's Ewald Nowotny said the time has not yet come to unwind central bank support measures, saying loose policy was "appropriate."

Central banks always need to be ready to rein in extraordinary support they provide if warranted, he told a news conference, but added: "In my view this is not yet the case at the moment."

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.


© 2014 Thomson/Reuters. All rights reserved.

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