Policy: Economy

European Central Bank leaves rates unchanged amid falling inflation, considers quantitative easing

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PennAve,Joseph Lawler,Economy,Inflation,Europe,Interest Rates,Italy

In the face of 12-percent unemployment and 0.5-percent inflation, the European Central Bank took no action Thursday following the meeting of its monetary policy council.

Mario Draghi, the Italian president of the ECB, said that the "moderate recovery of the euro area economy is proceeding in line" with expectations, justifying keeping the key target interest rate at .25 percent.

Euro area unemployment hasn't budget from 12 percent since October of last year. Meanwhile, inflation has been steadily falling, from 1.7 percent in March 2013 to 0.5 percent in March.

Just like Federal Reserve chairwoman Janet Yellen, and Ben Bernanke before her, Draghi says he's convinced that although near-term inflation is slipping, it's only temporary -- rates will rise over the medium term. "Inflation expectations for the euro area over the medium to long term continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent," he said.

Also like the Fed, the ECB relies on forward guidance for easing. Draghi's statement included a promise to keep rates low for an "extended period of time" — language similar to the Fed's "considerable period" phrasing it used before tying forward guidance to specific goals in recent years.

But the major difference between the Fed and the ECB over the course of the post-recession period is that the Fed has undertaken massive quantitative easing programs intended to avert disinflation and spur growth. The ECB, which faces institutional constraints the Fed does not, has not.

With outright deflation looking near, however, Draghi insists that large-scaled bond purchases are a possibility.

The bank is committed to "using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation," he said.

And in comments to the press, he also said that ECB officials have "rich and ample" discussions about the possibility of quantitative easing.

Inflation has also been steadily slowing in the U.S. for several years, as well. Headline inflation was just 1.1 percent in the latest reading, well below the Fed's 2 percent target. Core inflation, the less volatile measure that strips out food and energy prices, has also trended down:



The U.S. has avoided a double-dip recession, unlike the Euro area, which fell into a recession in mid-2012. Although the exact reason why is a question economists will debate for years, part of the formula has been the quantitative easing programs the Fed launched in 2010 and again in 2012 as growth stalled out. It appears that the ECB, contending with terrible conditions in Europe, is finally considering a similar approach.
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