2014.08.0806:10:22UTC+00ECB readies to introduce quantitative easing

Weak and fragile growth is forcing the European Central Bank (ECB) to move forward with additional monetary measures sooner than they would have preferred to further boost growth in the eurozone.

President Mario Draghi revealed this week that the ECB has “intensified preparatory work” to introduce quantitative easing as a potential tool to stave off deflation in the region and jumpstart stagnating growth. The decision to seriously consider injecting cash through an assets buying program was motivated by recently released data that showed that growth in the 18 member union continued to slow down.

Gross domestic product for the eurozone increased by only 0.2% during the first quarter of the year while more recent information indicated a drop in inflation in July to 0.4%, the lowest in five years. Disappointing performances in Germany and France, the eurozone’s first and second largest economies, and Italy, which has slipped back into a recession, have caused Berenberg to revise down its eurozone growth forecast this year to 0.8% from 1%. Berenberg’s chief economist Holger Schmieding says that, "Despite buoyant leading indicators, an easing of austerity and some lessening of the peripheral credit crunch, the economy now seems to be expanding more slowly than in mid-2013."

The official forecast for the monetary union’s growth in the second quarter is expected to be released next week by the Eurostat, the statistical arm of the European Union.

According to Draghi, the region’s fragile recovery is at risk of being lowered still due to geopolitical tensions. He called the impact of sanctions and retaliations of the international community on Russia as the biggest risk surrounding energy prices and export levels.

The central bank had earlier cut interest rates into the negative to encourage banks to lend more to businesses and boost activity among consumers. A package of cheap loans totalling €400 billion was also unveiled for non-mortgage purposes, both of which Draghi considers as being successful so far.

Policy makers at the ECB voted to keep interest rates at their current levels in line with market expectations. Draghi intends to maintain the current levels for an extended period of time even after as other advanced economies such as the US and the UK are preparing to tighten policy.