ECB likely to announce stimulus this week

Faced with falling prices and the risk of another recession, the European Central Bank this week is expected to announce a massive economic stimulus after trying to avoid taking the dramatic and controversial step for more than a year. Many economists predict the ECB’s 25-member governing council Thursday will vote to buy large amounts of government bonds to hold down long-term interest rates and stimulate growth. The program, known as quantitative easing, is similar to Federal Reserve bond purchases credited with jolting the U.S. economy after the 2008 financial crisis. The last round of those purchases ended in October.ecb_2280190b

A eurozone bond-buying program got a major boost last week when the advocate general of Europe’s highest court stated that such an initiative would not violate a prohibition against using monetary policy to finance national budgets. The court typically follows the advocate general’s recommendation. Quantitative easing, or QE, initially is likely to weaken the euro and further strengthen the dollar, hurting U.S. exports. But ultimately what’s good for the eurozone economy is good for U.S. multinational firms, and so stocks could get a lift if the ECB finally pulls the trigger, says Lucy O’Carroll, chief economist of Aberdeen Asset Management.

Yet it’s much thornier to buy government bonds in the eurozone’s fragmented economy with 19 member states than it was in the U.S. Germany is among nations opposed to the initiative, but the measure is still likely to pass, says Barclays Capital economist Antonio Garcia Pascual. “If they don’t do this on Jan. 22, markets will be shocked” and could fall sharply, says Edwin Truman, senior fellow at the Peterson Institute for International Economics and former assistant U.S. Treasury for international affairs.

Ratcheting up the pressure on the ECB to act was a report that eurozone consumer prices fell 0.2% in December, and economists expect several more months of deflation. Although the drop was due solely to plummeting oil prices, a persistent fall in prices can prompt consumers to postpone purchases, leading to further declines and recession.

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