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Monday October 14th, 2019 7:10AM

After Fed turn, Europe faces stimulus question

By The Associated Press
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FRANKFURT, Germany (AP) — The European Central Bank is weighing what to do about growth worries and sluggish inflation, just two days after the U.S. Federal Reserve opened the door to more stimulus.

Speculation has grown that the bank could act to boost the economy against a background of sagging market expectations for inflation, a sign of growing pessimism about growth.

Both the ECB and the Fed have paused efforts to withdraw stimulus deployed in the wake of the Great Recession and global financial crisis. Worries about the global economy are now raising expectations that the Fed could actually cut interest rates as its next step.

Chairman Jerome Powell said Tuesday that the Fed is prepared to respond if it decides the Trump administration's trade conflicts are threatening the U.S. economy. Investors read his remarks as a signal that the Fed will likely cut interest rates later this year.

Markets and analysts are waiting to see what the ECB's governing council decides Thursday at a meeting in Vilnius, Lithuania, where the Frankfurt-headquartered bank is holding its once-yearly road meeting. President Mario Draghi will hold a news conference after the meeting.

The bank could, among other things, say it is offering very favorable interest rates in an already-announced round of cheap, long-term loans to banks.

The credit is aimed at replacing early infusions of cheap money that are expiring in coming months so that banks do not tighten credit to companies as a result. Some analysts think the ECB could attach a negative interest rate to the credit under some conditions, meaning banks would get paid to take the money.

The ECB could then make lending to companies a condition of banks' getting the cheap money, pushing more stimulus and credit into the economy.

The central bank could also put off the earliest date for an increase in interest rates. Currently, the bank has promised to hold rates unchanged at least until year-end.

The ECB's benchmark rate for lending to banks is zero. On top of that it has imposed a 0.4% negative interest rate on deposits it takes from banks, which pushes them to loan the money.

Like the U.S., the 19-country eurozone is seeing economic growth. The eurozone grew 0.4% in the first quarter. But indicators have been mixed recently.

Businesses have become more cautious due to fears that the trade dispute between the U.S. and China will escalate and result in more tariffs, or import taxes, as U.S. President Donald Trump seeks to reduce China's trade surplus with the U.S.

Meanwhile, inflation has consistently lagged the ECB's goal of just under 2%, even despite a massive stimulus program that saw the central bank buy 2.6 trillion euros ($2.9 trillion) in bonds from March 2015 until the end of last year.

Central bank policies affect company and personal finances throughout the economy. Steps to lower rates and increase the availability of credit in theory make it easier and cheaper for companies, home buyers and consumers to borrow. Central bank policies can also have a strong influence on asset prices; low rates on savings can make riskier investments such as stocks relatively more attractive. The U.S. Standard & Poor's broad market index jumped 2% on Powell's comments.

  • Associated Categories: Associated Press (AP), AP Business, AP Business - Economy, AP Business - Financial Markets, AP Business - Industries, AP Business - Financial Services
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