Wednesday 20 September 2017

ECB may need to print more cash to keep recovery on track

The headquarters of the European Central Bank (ECB)
The headquarters of the European Central Bank (ECB)
Colm Kelpie

Colm Kelpie

STANDARD & Poor's has warned that the European Central Bank (ECB) may have to print more money to maintain recovery in the eurozone.

The ratings giant said that while the currency bloc is climbing out of recession, the recovery will be arduous and unevenly balanced.

Economists also warned that the slowing inflation rate could tip over into deflation in some weaker economies.

The research report gives no assessment of Ireland, but its findings reinforce the fact that while growth has returned to the eurozone, the recovery is tentative.

It said the Frankfurt-based ECB may not be able to wait until the European-wide stress tests are completed at the end of next year before taking further measures to boost the economy, especially because of the fall in the rate of inflation.

The inflation rate across the eurozone rose to 0.9pc in November from the previous month, but it remains well below the 2pc target laid down by the ECB. The ECB has kept interest rates at a record low.

UNION

S&P said there were several measures that the ECB could contemplate, provided European leaders press ahead with the institutional aspects of banking union.

"The ECB could introduce a new long-term refinancing operation with a very long maturity, given that excess liquidity in the Euro system remains very low," the ratings agency said.

"This refinancing could be extended with a condition: that banks turn additional liquidities into actual loans instead of using them to buy sovereign bonds."

S&P said the clause would be similar to the Funding for Lending Scheme introduced by the Bank of England in July last year.

"Whatever it opts to do, the ECB will, in our view, have to play the role of the patient gardener in watering those green shoots that have emerged in the eurozone since the middle of the year."

The report said that 2013 is closing on mixed signals, describing the 0.1pc growth rate for the eurozone in the third quarter as being sobering. French GDP contracted by 0.1pc while Germany rose 0.3pc.

Irish Independent

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