ECB Officials Open to More Stimulus, but Divisions Remain

European Central Bank President Mario Draghi, left, meets with Portuguese officials in Lisbon on Thursday. “The ECB does not surrender to excessively low inflation,” Mr. Draghi wrote in the bank’s annual report published Thursday. ENLARGE
European Central Bank President Mario Draghi, left, meets with Portuguese officials in Lisbon on Thursday. “The ECB does not surrender to excessively low inflation,” Mr. Draghi wrote in the bank’s annual report published Thursday. Photo: ANTONIO COTRIM/European Pressphoto Agency

FRANKFURT—Top European Central Bank officials on Thursday underlined their willingness to launch fresh stimulus if needed to bolster the eurozone’s weak economy, but the minutes of the bank’s latest policy meeting laid bare divisions over just how to do that.

Speaking at a meeting with senior Portuguese officials in Lisbon, ECB President Mario Draghi said the central bank had no shortage of tools available to drive up stubbornly low inflation, and would continue to do “whatever is needed.”

“The ECB does not surrender to excessively low inflation,” Mr. Draghi wrote separately in the bank’s annual report, which was published on Thursday. He warned that this year would be “no less challenging” than the last for the central bank amid uncertainty about the global economy and persistent forces weighing on inflation.

The comments, which echo the recent gloomy tone of several Federal Reserve officials, come amid fresh signs of economic weakness in the euro area. A closely watched business survey indicated this week that first-quarter activity increased at the slowest pace since late 2014. The eurozone’s inflation rate was minus 0.1% in March, far below the ECB’s target of just below 2%, according to the European Union’s statistics agency.

“We still think that a further extension of the [ECB’s bond-purchase program] is likely at some point and would not entirely rule out more drastic measures such as some form of ‘helicopter drop,’” said Jonathan Loynes, an economist at Capital Economics in London.

However, two senior ECB officials on Thursday said that so-called helicopter money—an extreme form of stimulus that involves direct distribution of money by central banks to the public—wasn’t being considered at the central bank.

The concept has risen to prominence in recent months as central banks across advanced economies seek new ways to drive up stubbornly low inflation and convince investors they haven’t run out of policy ideas.

Helicopter money is “not on the table; it’s not even discussed,” the ECB’s chief economist, Peter Praet, told an audience in Frankfurt. ECB Vice President Vítor Constâncio underlined the message to a committee of European lawmakers in Brussels. “We are not considering anything of that sort,” he said.

Short of that, though, Mr. Constancio stressed that the central bank would continue to do whatever is needed to drive up ultralow inflation. Mr. Praet said the ECB stands ready to “recalibrate” its stimulus if needed to deal with adverse shocks.

The ECB already has ramped up its stimulus significantly in recent months. It unveiled a new package of measures on March 10, its second in three months, including cuts to all its main interest rates, a series of ultracheap loans for banks and an acceleration of its bond purchases to €80 billion ($ 91 billion) a month.

But with inflation rates so far off target, investors almost immediately raised the prospect of yet another stimulus package.

According to the minutes of the March meeting, published Thursday, ECB policy makers were concerned about pushing the date for hitting their inflation goal ever further into the future. They were in “broad agreement” over the need for a “strong policy response,” but differences emerged over which policy measures to deploy.

In particular, the benefits of further interest-rate cuts appeared to split the council. The ECB cut its deposit rate—charged for storing funds with the central bank—to minus 0.4% in March, a new low.

Some council members raised concerns about possible adverse side effects from subzero rates, including pressure on banks’ profits that could destabilize the financial system or lead to higher loan costs. But others called for a sharper rate cut, arguing that negative rates had been effective, and that banks’ income hadn’t been harmed.

Banks complain that negative rates act as a tax, crimping profits, because they usually can’t pass on the costs to customers.

Mr. Draghi said in March that he didn’t anticipate any more rate cuts, sending the euro soaring and financial markets tumbling. But the minutes show council members didn’t rule out such a move.

Mr. Praet argued on Thursday that subzero interest rates have encouraged banks in less vulnerable euro-area countries to grant more loans to consumers and businesses. He said the ECB was “very well aware” of possible negative side effects from subzero rates.

Some council members also voiced concerns at their March policy meeting over the ECB’s bond-purchase program and its decision to offer a new series of cheap four-year loans for banks. The terms for the latter appeared rather generous, some members complained. Under the new plan, due to launch in June, some banks could be paid to borrow.

The ECB’s stimulus measures have faced strong criticism in Germany, the eurozone’s largest economy. Bundesbank President Jens Weidmann said last month that he found the ECB’s latest package unconvincing, and that it went too far. German business daily Handelsblatt published a front-page image of Mr. Draghi using euro notes to light a cigar.

Mr. Praet made an impassioned defense against such criticism. “[They say] money is worthless,” he said of the ECB’s German critics. “Thank you very much, give it to me if it is worthless.”

Write to Tom Fairless at [email protected]


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