FRANKFURT — The European Central Bank gave its strongest signal yet that it was considering action to stimulate the euro zone economy. But the bank immediately faced criticism that talk of large-scale bond purchases — the same method used by the Federal Reserve to help restart the United States economy — was little more than a bluff.
Mario Draghi, the central bank’s president, said that members of the bank’s Governing Council, which met Thursday, had a “rich and ample” discussion about so-called quantitative easing, purchases of government or corporate bonds on a grand scale as a way of reducing market interest rates.
In addition, the central bank left its benchmark rate at 0.25 percent on Thursday, already a low.
Inflation in the euro zone was 0.5 percent in March, its lowest level since 2009. Mr. Draghi said that the Governing Council had grown concerned about some of the negative effects of subdued price increases, which make it harder for euro zone countries like Greece or Italy to reduce their huge debts.
VideoThe bank left its benchmark rate at 0.25 percent, choosing not to respond to economists’ warnings about low inflation. Mario Draghi, the bank’s president, said inflation was expected to pick up.
The Governing Council “is unanimous in its commitment to using also unconventional instruments” to confront the risks of a prolonged period of low inflation, Mr. Draghi said, reading from a prepared statement.
The statement was the central bank’s most explicit indication yet that it was ready to deploy quantitative easing. Use of the word “unanimous” in the statement was evidently intended to show that such a move would not face dissent within the council from conservative members like Jens Weidmann, who is also president of the German central bank, the Bundesbank.
At a news conference, though, Mr. Draghi declined to give specifics about how quantitative easing might be carried out in Europe, where most credit comes from banks rather than from corporate bonds as in the United States. That means the central bank would have fewer assets to buy as a way of pumping money into the economy.
The lack of detail caused some analysts to conclude that Mr. Draghi, whose most effective monetary tool has often been his spoken words, was bluffing.
“It’s hard to say how much of the rhetoric is a genuine signaling of Q.E. intent and how much is just trying to talk down the euro,” Luke Bartholomew, an investment manager at Aberdeen Asset Management, said in an email.
The euro dipped against the dollar after Mr. Draghi’s remarks to $1.37, down 0.37 percent from earlier in the day.
Mr. Draghi said inflation was expected to pick up this month. That was probably one reason that the Governing Council decided not to take any steps now to stimulate the economy. And while Mr. Draghi said the council expected inflation to remain low in the midterm, the bank still expects inflation to approach the 2 percent level, which the bank sees as its target, in 2016.
Mr. Draghi may be hoping that an increase in inflation in April will remove pressure on the central bank to be more aggressive. Mr. Draghi betrayed some annoyance Thursday with outsiders, including top officials of the International Monetary Fund, who have been exerting such pressure.
“The I.M.F. has been recently extremely generous with its suggestions of what we should do or not do,” Mr. Draghi said with sarcasm. “We are really thankful for that.”
The central bank’s council, he said, is unanimous in its commitment to taking steps to address low inflation if it deems them necessary. But for now, he said, “We need more information.”
Some economists have begun to warn of the perils of “lowflation,” a term used to describe the phenomenon affecting the euro zone.
Lowflation is not as damaging as deflation, a broad-based decline in prices that undercuts corporate revenue and often leads to higher unemployment because companies stop creating jobs.
But very low inflation has other negative effects. When inflation falls, borrowers effectively pay more interest on existing loans. For example, a company that took out a loan when inflation was 2 percent, the European Central Bank’s official inflation ceiling, would expect the effective cost of the loan to decline over time as price rises eroded the value of the principal.
But if inflation falls, the cost of the loan is higher than the company expected. If the company is not able to raise its prices, it might have trouble paying its debts. In Europe, this negative effect is especially damaging because the countries with the highest debts tend to have low or negative inflation. In Greece, Portugal and Spain, prices are falling.
“With low inflation, the real value of this debt doesn’t go down as fast as it would if inflation were higher,” Mr. Draghi said. “It makes the adjustment of imbalances much more difficult.”
Mr. Draghi also argued, though, that low inflation was largely the result of falling energy prices and other one-time factors and would pick up in May.
He acknowledged that deflation had posed problems in Japan in the 1990s, but added, “We don’t see those risks now in the euro area.”
The problem for the central bank is that the measures available to stimulate the euro zone economy are all risky and controversial.
Extensive purchases of corporate or government bonds, the same tool used by the Federal Reserve to pump money into the American economy, would be more difficult in Europe. The Fed can buy United States Treasury bonds, the most widely traded debt in the world. The E.C.B. would have to choose among different bonds from its member countries. In addition, the corporate bond market in Europe is much smaller because companies tend to get credit directly from banks.
“Our institutional and financial setup is considerably different from what it is in the United States,” Mr. Draghi said. “The program has to be carefully designed.”
Mr. Draghi’s specific talk of quantitative easing on Thursday may have raised expectations that will be difficult to meet, some analysts said.
“From here on, a further verbal stepping up seems impossible,” Carsten Brzeski, an economist at ING Bank, said in a note to clients. “In a way it’s a gamble, either the recovery continues and inflation picks up again, or the E.C.B. will have to act.”
Mario Draghi, the central bank’s president, said that members of the bank’s Governing Council, which met Thursday, had a “rich and ample” discussion about so-called quantitative easing, purchases of government or corporate bonds on a grand scale as a way of reducing market interest rates.
In addition, the central bank left its benchmark rate at 0.25 percent on Thursday, already a low.
Inflation in the euro zone was 0.5 percent in March, its lowest level since 2009. Mr. Draghi said that the Governing Council had grown concerned about some of the negative effects of subdued price increases, which make it harder for euro zone countries like Greece or Italy to reduce their huge debts.
VideoThe bank left its benchmark rate at 0.25 percent, choosing not to respond to economists’ warnings about low inflation. Mario Draghi, the bank’s president, said inflation was expected to pick up.
The Governing Council “is unanimous in its commitment to using also unconventional instruments” to confront the risks of a prolonged period of low inflation, Mr. Draghi said, reading from a prepared statement.
The statement was the central bank’s most explicit indication yet that it was ready to deploy quantitative easing. Use of the word “unanimous” in the statement was evidently intended to show that such a move would not face dissent within the council from conservative members like Jens Weidmann, who is also president of the German central bank, the Bundesbank.
At a news conference, though, Mr. Draghi declined to give specifics about how quantitative easing might be carried out in Europe, where most credit comes from banks rather than from corporate bonds as in the United States. That means the central bank would have fewer assets to buy as a way of pumping money into the economy.
The lack of detail caused some analysts to conclude that Mr. Draghi, whose most effective monetary tool has often been his spoken words, was bluffing.
“It’s hard to say how much of the rhetoric is a genuine signaling of Q.E. intent and how much is just trying to talk down the euro,” Luke Bartholomew, an investment manager at Aberdeen Asset Management, said in an email.
The euro dipped against the dollar after Mr. Draghi’s remarks to $1.37, down 0.37 percent from earlier in the day.
Mr. Draghi said inflation was expected to pick up this month. That was probably one reason that the Governing Council decided not to take any steps now to stimulate the economy. And while Mr. Draghi said the council expected inflation to remain low in the midterm, the bank still expects inflation to approach the 2 percent level, which the bank sees as its target, in 2016.
Mr. Draghi may be hoping that an increase in inflation in April will remove pressure on the central bank to be more aggressive. Mr. Draghi betrayed some annoyance Thursday with outsiders, including top officials of the International Monetary Fund, who have been exerting such pressure.
“The I.M.F. has been recently extremely generous with its suggestions of what we should do or not do,” Mr. Draghi said with sarcasm. “We are really thankful for that.”
The central bank’s council, he said, is unanimous in its commitment to taking steps to address low inflation if it deems them necessary. But for now, he said, “We need more information.”
Some economists have begun to warn of the perils of “lowflation,” a term used to describe the phenomenon affecting the euro zone.
Lowflation is not as damaging as deflation, a broad-based decline in prices that undercuts corporate revenue and often leads to higher unemployment because companies stop creating jobs.
But very low inflation has other negative effects. When inflation falls, borrowers effectively pay more interest on existing loans. For example, a company that took out a loan when inflation was 2 percent, the European Central Bank’s official inflation ceiling, would expect the effective cost of the loan to decline over time as price rises eroded the value of the principal.
But if inflation falls, the cost of the loan is higher than the company expected. If the company is not able to raise its prices, it might have trouble paying its debts. In Europe, this negative effect is especially damaging because the countries with the highest debts tend to have low or negative inflation. In Greece, Portugal and Spain, prices are falling.
“With low inflation, the real value of this debt doesn’t go down as fast as it would if inflation were higher,” Mr. Draghi said. “It makes the adjustment of imbalances much more difficult.”
Mr. Draghi also argued, though, that low inflation was largely the result of falling energy prices and other one-time factors and would pick up in May.
He acknowledged that deflation had posed problems in Japan in the 1990s, but added, “We don’t see those risks now in the euro area.”
The problem for the central bank is that the measures available to stimulate the euro zone economy are all risky and controversial.
Extensive purchases of corporate or government bonds, the same tool used by the Federal Reserve to pump money into the American economy, would be more difficult in Europe. The Fed can buy United States Treasury bonds, the most widely traded debt in the world. The E.C.B. would have to choose among different bonds from its member countries. In addition, the corporate bond market in Europe is much smaller because companies tend to get credit directly from banks.
“Our institutional and financial setup is considerably different from what it is in the United States,” Mr. Draghi said. “The program has to be carefully designed.”
Mr. Draghi’s specific talk of quantitative easing on Thursday may have raised expectations that will be difficult to meet, some analysts said.
“From here on, a further verbal stepping up seems impossible,” Carsten Brzeski, an economist at ING Bank, said in a note to clients. “In a way it’s a gamble, either the recovery continues and inflation picks up again, or the E.C.B. will have to act.”
