Faced with a struggling economy and limits on the potency of conventional means to stimulate it, the ECB could consider options including long-term loans, corporate-bond purchases and forward guidance on interest rates. In the past, policy makers have found arguments against most of them.
Last month, the Governing Council tasked technical committees at the central bank to investigate ways to stimulate lending to small- and medium-sized businesses, which provide about half of all jobs in Italy and Spain. That plan may involve other institutions such as the European Investment Bank or the European Commission, Draghi said on April 4.
Since Draghi said the ECB stands “ready to act” in the face of worsening data, inflation slowed to 1.2% in April, the lowest level since February 2010 and well below the ECB’s 2% price-stability threshold.
Economic confidence as measured by the European Commission dropped to its lowest level since December, suggesting business executives and consumers doubt that Draghi’s predicted recovery this year will actually materialize. On top of that, unemployment in the 17-member euro area rose to a fresh record of 12.1% in March and manufacturing output contracted for a 21st month in April.
“So far we haven’t seen any improvement in the situation,” Draghi said at a press conference in Washington on April 19.
“The central arguments for a rate cut are the persistently weak economic confidence indicators that don’t point to a rapid recovery, and the increasing danger of undesirably low inflation rates,” said Kristian Toedtmann, senior economist at DekaBank in Frankfurt. “We see an interest-rate move as more than just a cosmetic maneuver. It would keep long-term money-market rates low or even lower them further.”
Still, with economies like Spain and Italy stuck in recession and their banking systems wary of taking on more risk, today’s rate cut may not automatically pass through to companies and households wanting to invest.
“The ECB has continuously stated that fixing monetary transmission will be much more effective than cutting interest rates from the current levels and is key to supporting a recovery in the periphery,” said Anders Svendsen, an economist at Nordea Bank Denmark A/S in Copenhagen. “To the ECB, fixing monetary transmission is done with the use of non-standard measures.”
Asmussen said last week that the effect of any further rate reductions may only be “limited” because they are not being passed on in the economies that need them most. He also said that the ECB can’t emulate the policies of the Bank of England, the Bank of Japan and the Fed.
“Large-scale asset purchase programs targeted at capital markets would not be very helpful in the euro area” and policies like forward guidance or quantitative easing “are not easily applicable here,” he said in a speech in London on April 25. One day later, he told a Frankfurt audience that higher inflation or targeting the rate of unemployment “are ideas that we simply cannot entertain.”