Account shows ECB fears of low inflation becoming ingrained

FRANKFURT, Germany — Officials at the European Central Bank worried weak inflation was becoming ingrained in the economy when they launched more stimulus last month — and said they were ready to do more if things don’t pick up.

A written account of that March 10 meeting says “risks of second-round effects appeared to have increased” since the bank’s previous meeting.

Second-round effects are when people expect low or falling prices, leading them to set lower wage and price agreements. That can be poison for the economy as it can depress spending and investment.

If inflation gets a further push downward from troubles with the global economy, the 25-member governing council “would not rule out future cuts in policy rates,” the account says.

That would take rates down from current extreme lows. The bank lowered its main benchmark for short-term lending between banks to zero at the March meeting. It also lowered its penalty rate for banks that leave money at the central bank to minus 0.4 percent. That is aimed at pushing banks to lend the money instead of leaving excess funds at the central bank.

Officials at the U.S. Federal Reserve also took a cautious view of the global economy at their last meeting, minutes released Wednesday indicated. The Fed lowered its projection for rate increases this year to only two quarter-point hikes, from four. The Fed started raising rates in December, but since has held off amid fears about slowing growth in China and turmoil on stock and bond markets.

The decision on the ECB stimulus in March wasn’t unanimous, however. It faced questioning from at least a few members on several key points.

The bank decided to step up its bond-buying program, offer new ultra-cheap loans to banks, cut its benchmark interest rate to zero, and increase penalties for banks that leave money at the central bank rather than lend it.

At least one skeptic on the ECB board said more cheap loans to banks risked making them depending on central bank funding. The package was approved, however, “by a large majority of voting members.”

The ECB’s moves to provide more stimulus have also run into resistance from some politicians in Germany.

While the ECB must come up with one set of policies for the entire 19-country eurozone, where growth is sluggish, Germany on its own enjoys low unemployment of 4.3 percent and would need less stimulus-oriented policies. Also, the ECB’s low rates have pushed down interest returns for savers and pension programs.

Earlier Thursday, ECB executive council member Benoit Coeure pushed back against criticism of the stimulus programs, saying “we have to act” to raise inflation and growth.

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