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 ECB President Mario Draghi cited instability across the Middle East
as well as tensions between Russia and Western countries over the
conflict in Ukraine among factors weighing on growth in the single
currency area. Moscow has retaliated for European Union sanctions by
halting imports of food from Europe.
At a news conference after the bank's monthly policy-setting
meeting, he stressed the ECB was ready to resort to quantitative
easing - printing money to buy securities - if the outlook for
inflation fell further. But he brushed off July's 0.4 percent
reading, the lowest in more than four years, as a glitch due to
temporary energy and food price falls.
"Geopolitical risks are heightened, are higher than they were a few
months ago. And some of them, like the situation in Ukraine and
Russia will have a greater impact on the euro area than they ...
have on other parts of the world," Draghi said.
Having cut interest rates to record lows in June, the euro zone's
central bank kept them steady, waiting to see whether schemes such
as the ultra-cheap four-year loans to banks it will launch in
September will prompt them to lend more.
The decision by the ECB's Governing Council, with representatives
from the 18 countries that use the euro, had been expected by
economists.
Many are now shifting their attention to next year, when they hope
the ECB will follow the United States and other major central banks
in launching a quantitative easing program.
Draghi explicitly mentioned that option along with the possibility
of buying asset-backed securities (ABS), despite the stated
reluctance of Germany's influential Bundesbank.
"I can only reaffirm that the Governing Council is unanimous in its
commitment to also use unconventional measures like ABS purchases,
like QE, if our medium-term outlook for inflation were to change,"
the ECB chief said.
The ECB expected strong take-up for next month's flood of cheap
money for banks to lend to businesses, he said, adding that real
interest rates in the euro zone would remain negative for far longer
- up to five years - than in the United States.
EVENTS
While Thursday's news conference did not signal any change in
policy, some economists said events could make the ECB act.
"The euro zone is at a crossroads and the economy can go either
way," said James Knightley, an economist with ING.
"We are starting to see some signs of stagnation and the
geopolitical situation is adding to the risks. Can the weaker euro
and better credit conditions offset that? If they don't, that will
force the ECB's hand."
Russia has banned imports of fruit and vegetables from the European
Union in retaliation for sanctions against Moscow, while NATO warned
this week that Moscow could use the pretext of a humanitarian
mission to invade eastern Ukraine.
Nonetheless, many economists do not expect a reaction from Frankfurt
unless there is a dramatic turn for the worse.
"The geopolitical situation is increasing risks to the economy but
we don’t expect them to change course until next year," Societe
Generale economist Anatoli Annenkov said.
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"We expect the ECB to launch an asset purchase program early next
year, buying private-sector rather than government bonds at the
outset. But for the time being, they are going a different route to
encourage lending."
In June, the ECB became the first major central bank to charge banks
for holding their deposits overnight, a step designed to stop them
hoarding cash and lend instead.
Apart from Ukraine, the euro zone faces other hurdles.
Data this week showed Italy, the bloc's third-biggest economy, has
slipped back into recession while the Bundesbank says even
powerhouse Germany stagnated in the second quarter.
Italian Prime Minister Matteo Renzi has led calls to move away from
spending austerity to adopting looser EU budget rules, but has been
rebuffed by Berlin.
Draghi, an Italian, weighed into the debate by saying that those
countries that have carried out the most convincing structural
economic reforms were reaping the best rewards in higher growth - an
implicit rebuke to Italy and France.
He urged euro zone governments to stick to EU deficit reduction
rules and not throw away the gains of fiscal consolidation.
In France, the region's second biggest economy which is also
struggling, President Francois Hollande said the ECB and Germany
must do more to boost growth and fight a "real deflationary risk" in
Europe.
Asked about mounting French calls for a weaker euro to stimulate
growth, Draghi listed reasons why conditions were ripe for a fall in
the euro's exchange rate, including divergent interest rate
prospects with the United States.
Low prices are partly a result of spending cuts and lower wages,
reforms the ECB does not want to hinder. But if prices get stuck at
low levels, the ECB insists it is ready to act.
(Additional reporting by Paul Carrel in Frankfurt; Writing by Paul
Taylor; Editing by Catherine Evans)
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