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European Central Bank ready for 'decisive action' to aid economy

BusinessBusinessEuropean Central BankFinanceMoney and Monetary PolicyMario DraghiCentral Bank

FRANKFURT, Germany — The European Central Bank is ready to take "decisive action" using all available tools to spur the Eurozone's weak recovery, President Mario Draghi said Thursday.

Still, the ECB took no new steps at its monthly policy meeting, leaving its key interest rate unchanged at a record low of 0.25%. And Draghi declined to offer any more hints about what actions the bank might take in coming months.

The Eurozone economy grew only 0.1% in the third quarter, and the unemployment rate is at a record high of 12.1%. Draghi repeated the bank's reassurance that it intended to keep rates at current or lower levels for an extended time.

Beyond that, he held the door open for more measures to boost the economy, without saying what they are.

Draghi said it was pointless to speculate what specific actions the ECB might take. He would say only that the bank could use any tool permitted under the European Union treaty that created the bank and the shared euro currency.

Some indicators of business activity suggest the recovery in the 18-country Eurozone is strengthening gradually. Confidence among consumers and businesses about the future is on the rise, and retail sales have picked up.

But inflation is low. At only 0.8%, it is far below the ECB's goal of just under 2%. Fears are growing that the Eurozone could fall into a deflationary spiral, in which falling prices choke off growth. That's what happened in Japan in the 1990s.

Draghi said the ECB did not expect deflation in the Eurozone: "We are not in a Japanese scenario."

He warned, however, that policymakers should be vigilant.

Analysts say the ECB might offer cheap loans to banks on condition that the money is lent to companies. That would provide more credit so that businesses can expand and hire people.

Still, any stimulus measure has drawbacks. ECB officials have warned that pushing banks to make loans could interfere in their market-based decisions.

Cutting the main interest rate in theory would help growth, but the rate is already low.

The ECB could also penalize banks for hoarding funds in the form of deposits at the ECB, charging them a negative interest rate. But banks might just pass the costs on to customers.

On paper, the EU treaty also allows the ECB to purchase financial assets such as government bonds with newly created money to pursue its monetary goals, similar to what the U.S. Federal Reserve has done. That can increase the supply of money in the economy.

But ECB officials indicate that could be complicated given the different bond markets in the currency union. Such a step could face political opposition from Germany, where many officials and economists are skeptical of central bank activism.

Copyright © 2014, Los Angeles Times
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BusinessBusinessEuropean Central BankFinanceMoney and Monetary PolicyMario DraghiCentral Bank
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