ECB weighs further action as economic picture darkens

[December 04, 2014] By John O'Donnell

FRANKFURT (Reuters) - The European Central Bank kept the cost of borrowing at record lows after it met on Thursday, facing renewed pressure to prevent the bloc going into reverse including a public call from Washington to act.

With recovery stalled across many of the 18 countries that share the euro, ECB President Mario Draghi will present fresh growth and inflation forecasts from bank staff at his post-meeting news conference at 1330 GMT.

Both measures are likely to be downgraded further.

Mounting concerns about the euro zone economy were underlined by the U.S. Federal Reserve's influential vice chair, Stanley Fischer, who said that money-printing would help Europe as it had the United States.

"If the ECB moves in that direction, it will have positive effects," Fischer, who was Draghi's academic mentor at university, told a newspaper in Italy.

Draghi faces considerable political obstacles to taking this step, chiefly from a reluctant Germany. Last week, Sabine Lautenschlaeger, Germany's appointee to the ECB's Executive Board, said now was not the time for state bond buying.

So while the ECB could extend a scheme to buy secured debt to include corporate bonds, it is unlikely it will announce any money printing to buy government bonds.

Economists, roughly half of whom expect the bank to start buying government bonds - a step that should buoy the economy when banks exchange bonds for ECB cash - have pencilled this in for the first three months of next year.

ECB Vice-President Vitor Constancio has said the bank will be better able to gauge then whether it needs to take the ulitimate policy step.

At Thursday's meeting, the ECB left its main refinancing rate, which determines the cost of credit in the economy, at 0.05 percent.

It also kept the rate on bank overnight deposits at -0.20 percent, which means banks pay to park funds at the central bank.

DIVISIONS

Other major central banks including the Fed, Bank of Japan and Bank of England, have already used quantitative easing to stimulate their economies. But divisions between debt-shy euro zone countries such as Germany and southern states including Greece make such a step more difficult for the ECB.

Germany, the bloc's biggest economy by far and its most influential, fears it would encourage reckless borrowing.

"The euro zone needs growth and jobs to ensure that it survives," said Lena Komileva of consultancy G+ Economics, warning of the obstacles to so-called quantitative easing.

"Germany's strong opposition ... raises questions about its ability to act fast enough."

Draghi will address the media for the first time in the ECB's new 1.3 billion euro headquarters in an imposing Frankfurt skyscraper, designed to show the strength of the currency.

Euro zone inflation, a key yardstick of the economy's health and viewed by investors as a trigger for the ECB to buy government bonds, slowed to just 0.3 percent last month.

If prices were to start to falling, as they already have in some countries, that could discourage consumers from shopping while they wait for goods to get cheaper, creating a vicious circle that pulls down the economy.

A conflict in Ukraine, which has frozen much of EU-Russian commerce, a slowdown in momentum in China and war in Syria add to the gloom, as does the tumbling price of oil.

The ECB has already cut borrowing costs to record lows, given cheap loans to banks and started buying repackaged loans to kick-start lending.

(Additional reporting by Paul Carrel; Editing by Catherine Evans)

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