Recession Fears Grow in Europe and E.C.B. Signals Increase in Stimulus

Recession Fears Grow in Europe and E.C.B. Signals Increase in Stimulus


SINTRA, Portugal — The European Central Bank is poised to step up its stimulus to the eurozone economy in response to international tensions and the trade war, Mario Draghi, the bank’s president, signaled Tuesday in his strongest indication yet of concern about the global economy.

The stimulus could include an increase in purchases of government or corporate bonds, the so-called quantitative easing program that the central bank began winding down only six months ago.

Barring an improvement in the economic situation, Mr. Draghi told an audience of economists, “additional stimulus will be required.”

After the comments the euro declined in value against the dollar, as the prospect of lower interest rates in Europe prompted investors to seek the higher rates available on the United States currency. However, the Federal Reserve has also indicated it is considering lower interest rates.

Mr. Draghi’s remarks prompted President Trump to accuse him of deliberately pushing down the value of the euro “making it unfairly easier for them to compete against the USA.”

“They have been getting away with this for years, along with China and others,” the president tweeted. Mr. Trump has already imposed tariffs on European steel and aluminum and threatened to put duties on European cars.

Mr. Draghi’s eight-year term will end in October, and his statement at the central bank’s annual Forum on Central Banking, being held in Portugal, comes only days before European leaders will meet in Brussels to discuss choosing his successor.

By effectively committing the central bank to action as soon as its next monetary policy meeting, on July 25, Mr. Draghi is ensuring that economic stimulus will linger long after he leaves office.

His words, which built on comments he made earlier this month, could be seen as a kind of pre-emptive strike in case his successor turns out to be a conservative like Jens Weidmann, a member of the Governing Council from Germany who is considered a leading candidate. Mr. Weidmann, who was in the audience Tuesday, is seen as being less willing to aggressively combat a slowdown.

The remarks on Tuesday “may catch Draghi’s potential successor in a web of easing policies,” Bart Hordijk, an analyst at Monex Europe, a currency trading firm, said in a statement. “Even a more hawkish new E.C.B. president will have to take some time to untangle her/himself before further tightening can even be put on the agenda again.”

In December, the European Central Bank stopped adding to its stock of government and corporate bonds, which it had bought in large quantities to push down market interest rates. But in March, as President Trump’s trade war disrupted the global economy, the European Central Bank showed signs of having second thoughts, and revived a program designed to encourage banks to lend more to businesses and consumers as a means to prevent a recession.

Mr. Draghi suggested Tuesday the bank is ready to go much further, including adding to the 2.6 trillion euros, or $2.9 trillion, in government and corporate bonds that were acquired over several years as part of the quantitative easing program.

Some analysts have calculated that the European Central Bank cannot buy much more debt without exceeding levels that would grossly distort the market or invite legal challenges. But Mr. Draghi said Tuesday there is still “considerable headroom” for more bond purchases.

The central bank’s benchmark interest rate is already zero, and cannot go any lower. However, Mr. Draghi said the bank could increase the so-called negative interest rate on commercial banks’ deposits at the central bank. The rate is currently minus 0.4 percent, and amounts to a penalty on the deposits and a way of nudging banks to put the money to work in the economy.

The bank is determined to push chronically low inflation up to the official target, defined as below but close to 2 percent — the level considered optimal for growth, Mr. Draghi said. The central bank is even willing to overshoot the target if necessary, he said. Annual inflation in the eurozone was 1.2 percent in May.

“If we are to deliver that value of inflation in the medium term,” he said of the 2 percent target, “inflation has to be above that level at some time in the future.”





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