European Central Bank Joins Fed in Paving Way for Rate Cut

European Central Bank Joins Fed in Paving Way for Rate Cut
In this Dec. 11, 2018, photo the European Central Bank sits next to the river Main in Frankfurt, Germany. (Michael Probst/AP)
The Associated Press

FRANKFURT, Germany—The European Central Bank joined the U.S. Federal Reserve in making clear that more stimulus could be coming soon to support an economy weakening in the face of global trade tensions.

The ECB’s rate-setting board left its key interest benchmarks unchanged at a policy meeting on July 25 but said it could cut them as its next move. It also said it was telling staff to study ways to restart its bond-buying stimulus program in coming weeks.

Several analysts said the statements meant the ECB, which sets interest-rate benchmarks for the 19 countries that use the euro, could deliver a stimulus package at its Sept. 12 meeting.

President Mario Draghi stressed repeatedly at a news conference that the bank was “determined to act.”

“We say, we don’t like the current inflation,” he said. “No question of accepting the inflation we are seeing today.”

Inflation in the eurozone is at an annual 1.3 percent, short of the ECB’s goal of just under 2 percent that is considered healthiest for the economy, even after years of low-interest rates and massive amounts of monetary stimulus.

And global economic growth is being dragged down by events such as the U.S.-China trade war that have spurred other central banks, including the Fed, to also move toward providing more stimulus.

Officials at the Fed have signaled that they could cut their interest rate benchmark from a range of 2.25 percent to 2.5 percent at their July 30-31 meeting. Central banks in South Korea, Indonesia, and South Africa have already cut rates in recent days.

The U.S. and China have imposed import taxes on hundreds of billions of dollars-worth of traded goods. U.S. President Donald Trump has warned that more tariffs could be coming if he can’t reach a trade deal with China to reduce the U.S. trade deficit. Trump has also threatened to put tariffs on Europe’s big automotive industry.

Meanwhile, Britain’s exit from the European Union on Oct. 31 could result in tariffs on trade if the country does not reach a withdrawal deal with the rest of the bloc.

These combined uncertainties have mainly hurt the manufacturing sector in Europe, particularly in export-focused countries like Germany, where the labor market is otherwise strong.

The European Central Bank’s key move on July 25 was to change the wording of its policy statement by saying that rates will remain at current record lows “or lower” through the middle of 2020. Adding “or lower” emphasized that the next move could be downward.

The monetary authority for the 19 countries that use the euro meanwhile began looking into a possible new round of bond purchases, which inject newly created money into the economy in the hope of stimulating economic activity and raising inflation.

The central bank halted a 2.6 trillion-euro bond-buying program only at the end of last year, saying inflation was headed sustainably toward its goal. The inflation figure is important because the ECB is tasked above all with keep price increases steady. Price and growth indicators have weakened in recent months, however. Persistently low inflation can be a sign of economic weakness and can make it harder for indebted governments and consumers to reduce their debt burden.

It remains an open question how much more stimulus the ECB would get from a rate cut or bond purchases since rates are already low and the 2.6 billion euros in added stimulus has not been withdrawn from the financial system. Almost four years of bond purchases left the ECB still struggling to consistently reach the inflation target.

Draghi said that the past bond purchases have created millions of jobs but that wages gains were taking longer than expected to translate to higher consumer prices.

Central bank policies have a wide-ranging impact on companies, governments, and individuals. A return to more stimulus means cheaper borrowing for companies and governments, which can support business activity and take pressure off government budgets. It can mean paltry returns, however, for savers while boosting stock prices, at least in the short turn, by pushing people out of lower-yielding, safer investments into riskier ones.