ECB confronts slow economy, weak inflation

Associated Press
Jacob, an African resident in Spain, begs in front a shop window announcing sales, he holds up a piece of cardboard which reads. ''Hello Ladies and Gentleman. I have children. Help me to eat. Many thanks'', in Pamplona, northern Spain on Wednesday, Jan. 8, 2014. (AP Photo/Alvaro Barrientos)
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Jacob, an African resident in Spain, begs in front a shop window announcing sales, he holds up a piece of cardboard which reads. ''Hello Ladies and Gentleman. I have children. Help me to eat. Many thanks'', in Pamplona, northern Spain on Wednesday, Jan. 8, 2014. (AP Photo/Alvaro Barrientos)

FRANKFURT, Germany (AP) — The European Central Bank is confronting a weak recovery and low inflation as its top officials hold their monthly interest-rate meeting Thursday.

The monetary authority for the 18 countries that use the euro has already cut its benchmark interest rate to a record low 0.25 percent in an effort to stimulate growth.

Analysts say the ECB probably won't take further action to boost the economy at this meeting — but might in coming months. Investors will listen closely to President Mario Draghi's news conference for clues about what the bank might do.

The ECB faces worries over weak inflation of only 0.8 percent annually. That's a sign of anemic growth — and also makes it harder for financially troubled eurozone countries such as Greece to reduce their heavy debt loads.

The ECB's goal is to keep inflation at just under 2 percent annually. Lowering the ECB's benchmark interest rate and easing terms when it lends to private-sector banks can help do that. But so far the central bank's low rate is not getting through to customers in countries that need it the most.

Analysts say the ECB could eventually offer cheap, long-term loans to commercial banks on the condition the money is loaned to companies so they can expand their business. The eurozone economy grew only 0.1 percent in the third quarter.

Potential stimulus measures all have drawbacks. The bank could cut its benchmark rate at which it loans to commercial banks to 0.1 percent or even 0.0 percent. The hope would be that banks would then pass the cut along in terms of lower borrowing costs for companies. A rate cut could also lower the euro's exchange rate, boosting the competitiveness of the bloc's exports.

But the benchmark rate is already close to as low as it can go and often isn't being passed on by banks that have weak finances themselves.

Likewise, cutting the deposit rate into negative territory — that is, charging banks to hold money at the ECB instead of paying them — could push them to lend. But the banks could simply pass the costs on to their customers.

The ECB could also in theory try to increase the supply of money in the economy by purchasing financial assets such as government bonds using newly-created money, as the U.S. Federal Reserve has done. ECB officials, however, have said such a step would be very complicated in a currency union with debt issued by 18 different governments.

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