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 Even though the topic appears to be up for discussion, analysts say
that the ECB may never take such a drastic step for both political
and practical reasons. That's even though others, including the U.S.
Federal Reserve, have used such purchases to try to stimulate their
economies.
But the mere fact that several top ECB officials are talking about
asset purchases represents a bit of a shift. Executive board member
Peter Praet mentioned the possibility of purchasing assets during an
interview last week with the Wall Street Journal. And Vice President
Vitor Constancio did the same on Tuesday.
Such purchases, dubbed quantitative easing or QE, by economists,
involve using newly created money to buy financial assets such as
bonds from private-sector institutions. That can drive down
longer-term interest rates, increase the supply of money in the
economy and boost growth. It can also lower a country's exchange
rate, bringing trade advantages.
For years, ECB officials said very little about QE even though other
central banks took the plunge. The idea is met with skepticism in
Germany, in particular, where many regard it as potentially
inflationary and unduly rewards those indebted governments who have
failed to take the necessary steps to shore up their economies.
The catalyst for the current discussion about QE was the fall in the
eurozone's inflation rate to 0.7 percent in the year to October, way
below the ECB's goal of just under 2 percent.
That raised a new worry for a region that's grappled with a debt
crisis and a weak economy for years: does Europe face outright
deflation — a corrosive, chronic fall in prices that has afflicted
Japan for years? Or is the drop caused by benign factors such as
lower fuel prices, and efforts of indebted countries such as Greece,
Portugal and Spain to lower their relative prices to make their
economies competitive again?
ING analyst Carsten Brzeski said the ECB's primary mandate —
pursuing stable prices — means that German objections become weaker
if deflation is a real threat. He added that serious obstacles
remain such as strained bank finances in southern Europe.
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ECB president Mario Draghi has said little publicly about potential
asset purchases aside from a comment that "there are a whole range
of instruments that we can activate, if needed."
Here are other steps the bank could take to get more money in
circulation:
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Cut the amounts of cash banks are required to keep on reserve at
the ECB
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Lower the rate for bank deposits at the ECB to below zero, which
could get them to loan money rather than hoard it
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Make another round of cheap, long-term loans to banks, following
two earlier ones that handed out more than 1 trillion euros ($1.34
trillion).
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Draghi has said the ECB could cut the current interest benchmark
lower. There's little room left to do that, however after it was
reduced to a record low of 0.25 percent earlier this month.
Germany's top central banker, Jens Weidmann, said the ECB doesn't'
need to hurry on a further stimulus. "I don't think it's a good idea
to announce the next round right away," he said in an interview with
Die Zeit newspaper made available Wednesday.
[Associated
Press; DAVID McHUGH, AP Business Writer]
Copyright 2013 The Associated
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