Friday, April 18, 2014
YOLO COUNTY NEWS
99 CENTS

ECB cuts growth outlook for eurozone, holds rates

FRANKFURT, Germany (AP) — The European Central Bank underlined the gloomy prospects for the economy of the 17 European Union countries that use the euro, cutting its forecast for growth next year to minus 0.3 percent from plus 0.5 percent.

Even so, the bank left rates unchanged at its meeting Thursday, and ECB head Mario Draghi gave little sign the bank was willing to add more stimulus. He said the bank had already done much to lower borrowing costs in heavily indebted countries that are struggling to grow.

The bank’s 22-member governing council kept the refinancing rate unchanged at 0.75 percent. The rate determines what private-sector banks are charged for borrowing from the ECB, and through that what rate the banks set for their businesses and consumer clients.

Draghi said current rates were “very accomodative” — meaning they are low enough to encourage growth. He also said that the ECB had already effectively lowered some interest rates with its plan announced in September to buy the bonds of indebted countries. That plan — which would drive down borrowing costs for indebted governments that ask for help — had already led to drop of as much as 2 or 2 ½ percentage points in some countries borrowing costs, just on anticipation by bond investors.

“That is much more than you can achieve by a cut in the policy rate,” Draghi said.

The eurozone’s economy is in recession, having shrunk 0.1 percent in the third quarter after a 0.2 percent fall in the previous three months. A recession is often defined as two quarters of negative growth in a row. It is expected to contract again in the last three months of the year.

Draghi said the slump would continue into next year, with a gradual recovery later in 2013. The bank’s minus 0.3 percent outlook is the midpoint of the forecast rate of between minus 0.9 percent and plus 0.3 percent.

Growth is being held back across the eurozone as governments slash spending and raise taxes to try to reduce levels of debt piled up from overspending in the case of Greece or real estate bubbles and banking crises in Spain and Ireland. Greece, Portugal, Ireland and tiny Cyprus have already needed bailouts, while Italy and Spain, the eurozone’s third- and fourth-largest economies, teetered on the edge of needing help this summer.

A rate reduction in theory could stimulate the eurozone’s economy by making it easier to borrow, spend and invest. But rates are already low, and borrowing remains weak. There are only a few early signs that previous rate cuts and stimulus measures are finally trickling through to the wider economy.

Draghi said that there had been a “wide discussion” on interest rates but that “in the end the consensus was to leave rates unchanged.” Use of the term “consensus” suggests the council was not unanimous, but many analysts think the ECB could leave rates alone well into next year and might be done cutting.

Some analysts think the bank may now consider it has done enough to help the economy after a year of drastic measures. The most important was an offer in September to buy unlimited amounts of bonds issued by of Europe’s heavily indebted countries. It also made €1 trillion ($1.3 trillion) in cheap, long-term loans to stabilize shaky banks last December and February, and cut rates a quarter point in July.

The bond purchase plan announced in September has helped stabilize the eurozone debt crisis. The purchases would aim to drive down bond interest rates, which would lower borrowing costs for indebted countries such as Spain and Italy and make it easier for them to manage their debt loads.

Although no bonds have been bought, the mere possibility has influenced the bond market. The interest yield on Spanish 10-year bonds is down to around 5.4 percent now, from 7.6 percent in July. Italy’s costs to borrow for 10 years are now down to 4.4 percent, down from over 7 percent at the start of the year and close to the country’s average for the past decade.

But while governments are breathing easier, that hasn’t restarted growth.

The ECB has tried to make sure that its crisis efforts are making it through to the eurozone’s wider economy — but it is taking time to be felt and fear and reluctance remain. While some business confidence indicators are beginning to rise and the supply of money in the economy is increasing, consumer spending sagged 1.2 percent in October.

————

By David McHugh, AP business writer

The Associated Press

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