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  HOME | Business & Economy (Click here for more)

European Central Bank Just Reversed Course with New Stimulus Measures

FRANKFURT – The European Central Bank made a major policy reversal on Thursday, unveiling plans for fresh measures to stimulate the euro zone’s faltering economy less than three months after phasing out a 2.6 trillion euro ($2.9 trillion) bond-buying program, making it the first rich-country central bank to ease policy in response to the global slowdown.

The ECB said it would hold interest rates at their current levels at least through the end of this year, months longer than previously signaled, and announced plans for a fresh batch of cheap long-term loans for banks. The first loans will be launched in September, each with a maturity of two years.

The series of policy moves represent a more aggressive response to the economic slowdown than investors had expected. The euro whipped around slightly against the dollar and was down around 0.4 percent on the day, with one euro buying $1.127. The Italian 10-year bond rallied on news of the ECB’s bank funding program, with yields falling to 2.586 percent from 2.647 percent.

The bank “surprised almost everyone by announcing a new series of measures, trying to avoid an unwarranted tightening” of its policy stance, said Carsten Brzeski, an economist at ING Bank.

The ECB is the first major developed country central bank to provide new stimulus at a time when the global economy is softening. The Federal Reserve has paused its march toward higher interest rates in recent months but hasn’t signaled any new easing steps. The Bank of Japan is buying bonds under a longstanding program.

The ECB has in the past been criticized for waiting too long to stimulate its economy, it launched large-scale bond purchases in early 2015, several months after the Fed ended its own program, and Thursday’s measures underscore the sharp weakening in Europe’s growth prospects.

Officials are seeking to shore up an economy that has been rattled by shocks ranging from a slowdown in China to mass protests in France and bottlenecks in Germany’s crucial auto industry. They are treading a careful path between providing sufficient support for the region’s softening economy while avoiding any appearance of panic, which could ricochet through financial markets.

Recent economic data show few signs of a rebound in eurozone growth, even if the outlook appears to have stabilized in parts of the region. Italy’s economy, the bloc’s third largest, slid into recession at the end of last year, and the region’s inflation rate has fallen to 1.5 percent. The ECB aims to keep inflation just below 2 percent.

Although the global economy has weakened in recent months, Europe seems to be feeling the brunt of it. On Wednesday, the Organization for Economic Cooperation and Development slashed its forecast for eurozone growth this year to 1 percent, from a 1.8 percent projection in November. In contrast, it only shaved slightly its projections for the US and China, by 0.1 percentage point each to 2.6 percent and 6.2 percent, respectively.

Investors have already pushed back their expectations for when the ECB might start raising short-term interest rates into the middle of next year.


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