Tags: Draghi | ECB | Growth | europe

Draghi: ECB Stands Ready to Act as Growth Outlook Dims

Wednesday, 06 Jun 2012 11:53 AM

European Central Bank President Mario Draghi said officials are ready to add more stimulus to the euro region’s economy if necessary, while damping expectations that another round of three-year funding for banks is imminent.

“We monitor all developments closely and we stand ready to act” as the economy faces “increased downside risks,” Draghi told reporters in Frankfurt after the ECB left its benchmark rate at 1 percent. “A few” governing council members asked for a rate cut today, he said.

The ECB is under pressure to lower rates and introduce more liquidity support for banks as governments struggle to fix a crisis that’s engulfing Spain and could force Greece out of the euro. While Draghi said that the ECB will extend its offerings of three-month unlimited cash into next year, he indicated that longer-term financing will have to wait.

“I don’t think it would be right for the ECB to fill other institutions’ lack of action,” said Draghi when asked about the prospect of another offering of three-year funds for banks.

“He’s delineating the role of the ECB from that of governments, as he seeks to get leaders to agree on a roadmap” to shore up the euro, said Julian Callow, chief European economist at Barclays Plc in London.

The euro fell along with Spanish bonds as Draghi spoke. The single currency dropped as much as 0.3 percent to $1.2441 before trading at $1.2495 at 3:54 p.m. in Frankfurt. The yield on Spain’s 10-year government bond climbed as much as 6 basis points to 6.2921 percent before slipping to 6.2428 percent.

Opening the Door

“The ECB today opened the door just a little bit for a possible rate cut,” said Holger Schmieding, chief economist at Berenberg Bank, in an e-mail. “But the ECB did so much less clearly than the markets had hoped for. In addition, the ECB offered no hint today that it may re-activate its two most important non-standard measures,” which he defined as the three-year long-term refinancing operations and bond purchases.

“This suggests that it would take a major further escalation of financial tensions for the ECB to go beyond a possible rate cut in July,” said Schmieding.

The Group of Seven nations yesterday agreed to coordinate their response to Europe’s turmoil, which has tipped at least eight of the 17 euro-area economies into recession and is threatening the global economy.

Recession Outlook

While the euro region narrowly avoided recession in the first quarter, latest data suggest the economy is shrinking again. German industrial output fell more than economists forecast in April and Spanish production had the biggest drop in more than two years, two reports showed today.

Unemployment has reached 11 percent, the highest level on record, and purchasing manager indexes show manufacturing and service industries are contracting at a faster pace than they were when the ECB last cut rates in December.

The ECB today forecast a 0.1 percent economic contraction in the euro area for this year, unchanged from a March estimate, while it cut its prediction for 2013 growth to 1 percent from 1.1 percent.

International Monetary Fund Managing Director Christine Lagarde said in an interview with Sweden’s Svenska Dagbladet published June 4 that it’s “clear” the ECB has room for another rate cut.

Bank of England

The Reserve Bank of Australia cited Europe’s crisis when cutting its benchmark rate yesterday by a quarter point to 3.5 percent, while the Bank of Canada held its key rate at 1 percent. The Bank of England will announce its latest policy decision tomorrow amid speculation it could increase asset purchases after the U.K. slipped back into recession.

Spain, which has resisted pressure to become the fourth euro-area nation to seek a bailout, called for the first time for European funds to shore up its banks.

The spread between Spanish and German 10-year bond yields widened to a record 5.4 percentage points last week and the cost of insuring against default on Spanish sovereign debt rose to a historic high.

Greece will meanwhile hold fresh elections on June 17 that could hand more power to parties opposed to the terms of the nation’s rescue package and precipitate its exit from the monetary union.

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