ECB under stimulus pressure as eurozone prices fall further, growth eases

ECB under stimulus pressure as eurozone prices fall further, growth eases
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The latest surveys of eurozone businesses showed private sector growth is continuing, but it eased very slightly this month.

Manufacturing activity was disappointing, but there was an unexpected pickup in the service industry.

Analysts said overall the numbers show the euro area’s recovery is gaining traction, though France remains in the doldrums.

For the European Central Bank the numbers are encouraging, but worryingly companies continue to drastically cut prices which threatens to lead to deflation.

ECB Executive Board member Peter Praet told euronews: “The context we have now is a more structural sort of pressure on prices which is a result of slack in the economy and so we have been taking accommodative monetary policy. We have done that for example by communicating our assessment about the situation, by saying we will have to face a relatively long period of subdued price pressure, related to weak economy, moderate growth and fragile growth.”

The ECB has already strongly hinted that it could go for more stimulus with a further cut in the cost of borrowing at its June policy meeting along with other steps to encourage commercial banks to lend money to businesses, particularly small and medium sized firms.

That could include moving the deposit rate into unprecedented negative territory, so that commercial banks that leave money on deposit with the ECB would not receive any interest on that cash.

“If banks have to pay interest on the money they park in the euro system, this could revive the money market between banks, among others, and therefore also stimulate lending to businesses,” said ECB Governing Council member Jens Weidmann.

A programme of asset purchases, known as quantitative easing, is also a possibility.

The US central bank, the Federal Reserve, has been doing that to pump money into the economy there.

with Reuters

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