By Brian Blackstone and Todd Buell
FRANKFURT--European Central Bank President Mario Draghi sent a
strong signal Thursday that the bank is prepared to expand its
already massive bond-buying program, underscoring an increasing
divergence in the monetary policies of the world's largest central
banks.
While the ECB opens the door to further expansive policy,
economists widely expect the U.S. Federal Reserve to start
tightening this year, possibly as soon as mid-September. The Bank
of England could follow early in 2016.
Meanwhile, the Bank of Japan, like the ECB, is buying large
amounts of assets, mostly government bonds, although additional
easing appears unlikely for now. Sweden's central bank also
signaled Thursday that it is ready to do more to boost
inflation.
This widening gap could spur volatility in financial
markets--particularly in exchange rates, which are sensitive to the
path of monetary policy.
European stocks and bonds rallied on Mr. Draghi's comments and
the euro tumbled 1% against the U.S. dollar. Central bank stimulus
typically weakens a currency, particularly if other key banks are
moving in the opposite direction.
Weaker growth in China and other emerging markets is dragging on
the eurozone's economy, Mr. Draghi warned at a news conference on
Thursday.
Asset purchases "are intended to run until the end of September
2016, or beyond, if necessary," he said--a statement investors and
economists took as a sign that the bank could extend its more than
EUR1 trillion ($1.1 trillion) bond-purchase program, known as
quantitative easing, beyond its targeted end date of September
2016.
"It wouldn't take much to push them into action, clearly the
concern [about too-low inflation] and the threat level is
elevated," said Nick Matthews, economist at Nomura.
Central banks across the developed world face a similar
challenge: Inflation rates are barely above zero and far below the
2% rate that most consider optimal.
Yet their economies are recovering at differing speeds. In the
U.S. and to a lesser extent the U.K., output has recovered and
unemployment has fallen, but growth remains feeble in the eurozone
and uneven in Japan.
In another sign that more stimulus may be on the way, the ECB on
Thursday increased the share of an individual bond issue that it
can purchase to 33% from 25%.
The technical change came after a six-month review of the
program--which was launched in March--and will ensure that the ECB
can execute its current EUR60 billion per month bond-buying
program.
"It clearly is a sign of the readiness of the Governing Council
to adapt the parameters of the program to the situation," Mr.
Draghi said. But the ECB didn't discuss specific steps Thursday, he
said. "We aren't there yet."
The ECB held its key interest rates at record lows.
Separately, Sweden's Riksbank left interest rates and its bond
purchase program unchanged but said that it "remains highly
prepared to make monetary policy even more expansionary in the
event of inflation prospects deteriorating."
While the ECB laid the groundwork for more stimulus, Federal
Reserve officials are embroiled in a debate about whether to nudge
short-term U.S. rates higher for the first time in nearly a
decade.
Fed officials have been signaling for months that they are
inclined to raise their target interest rate from near zero this
year as the U.S. labor market improves and underutilized resources
in the economy get soaked up.
They have been given pause of late, however, by turbulence in
financial markets and China's hard-to-understand economic slowdown.
The Fed's next policy meeting is Sept. 16-17 and officials have
been divided about whether to act on rates then or wait until they
have a better view on how markets and China might change the U.S.
outlook. A U.S. jobs report to be released by the Labor Department
on Friday could help shape their decision.
Meanwhile, Bank of England Gov. Mark Carney signaled in a speech
Saturday that the U.K. remains on course to begin slowly raising
interest rates early next year despite recent turmoil in global
financial markets.
"The big question about the U.S. is why the hell wages and
inflation aren't going up," said Charles Wyplosz, professor at The
Graduate Institute in Geneva. However, "nobody doubts that
(inflation) will be rising...Soon the same questions will be
arising in the U.K."
In contrast, the eurozone has struggled to recover from a pair
of recessions since 2008 and unemployment is nearly 11%, more than
twice the U.S. rate. With the economy still operating far below its
potential, the lack of inflation appears more deeply rooted in the
eurozone. "The eurozone is four or five years behind the U.K. and
U.S.," said Mr. Wyplosz.
The most recent data, published Monday, showed annual inflation
in the currency bloc at only 0.2% in August. That persistently low
level has raised fears of actual deflation, a prolonged period of
falling prices that leads businesses and households to hold back on
spending in the expectation of better deals in the future, thus
stunting economic growth.
The ECB's staff economists cut their forecasts for inflation and
economic growth through 2017, and--importantly--those projections
didn't take into account market turbulence in late August.
"We had a worsening of the situation in several emerging market
economies, and it's unlikely these challenges are going to be
quickly reversed," Mr. Draghi said. "Secondly, we had a tightening
of financial conditions across the board. We'll have to see whether
this is short-term volatility, or is permanent."
Mr. Draghi said he expects Chinese officials to provide more
details of their plans for tackling the economic slowdown and stock
market falls during meetings this weekend of finance ministers and
central bank chiefs from the Group of 20 largest economies in
Ankara, Turkey.
"That is going to be one of the major themes," he said. "We do
expect to have much more visibility in the coming days than we do
now."
Paul Hannon and Jon Hilsenrath contributed to this article.
Write to Brian Blackstone at brian.blackstone@wsj.com and Todd
Buell at todd.buell@wsj.com
(END) Dow Jones Newswires
September 03, 2015 16:30 ET (20:30 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.