European Central Bank Delay on Stimulus Causes Slip on Wall Street

European

The European Central Bank’s decision to delay creating an economic stimulus until next year is the cause for yesterday’s slip on Wall Street. Mario Draghi, the bank’s president, said at a press conference on Thursday that the institution will make changes that will keep inflation in check. He said prolonged deviations from set inflation goals would not be tolerated.

Following the announcement, Nasdaq Composite fell .04 points. The Dow Jones industrial average slipped to 12.2 points while the Standard and Poor’s index dropped 2.41 points.

Reasons for the delay include Germany’s opposition to introducing an economic stimulus that it says would be equivalent to bailing out other EU countries, and doubts among some member states that the stimulus will have an insignificant effect on the EU economy.

The European Central Bank keeps an eye on inflation in the European Union, which is currently at 0.05 percent. The goal is to keep it at 2 percent. Low inflation hinders companies from raising the prices of their products in order to remain profitable. This leads stagnation in hiring while reducing wages.

The energy sector is among the areas that have suffered most. This is due to Saudi Arabia’s decision to reduce its oil prices to Asia and the United States in January. The Brent Crude oil, considered a Benchmark for international oils and used by many U.S refineries, dropped 28 cents on the Ice Futures exchange in London.

According to Bloomberg News, the bank is weighing in on the possibility of buying government bonds that may include debts owed by the European government. Draghi did not make clear what assets the bank would target to buy. The bank would be following similar actions taken by the governments of Japan as well as the United States, where the current decision by the European Central Bank to delay the economic stimulus has caused a slip on Wall Street.

The bank last achieved its inflation goal of 2 percent more than two years ago. The chief Economist at Moody’s Analytics, Mark Zandi, expressed concern over the bank’s decision to not act on the stimulus. He said that continuing to do nothing will lead to loss of credibility for the institution.

In July 2012 Draghi said the bank would take all the necessary steps to preserve the Euro. Speaking at the Global Investment Conference in London, he said the bank’s challenges came from financial fragmentation in the region where investors preferred to operate within their national boundaries. He said this frustrated inter bank marketing across EU regions. He said that the decision by supervisors in some EU countries to limit cash liquidity within their boundaries had created a liquidity problem at the European Central Bank.

Europe’s worries have come about largely due to sanctions placed against Russia; one of EU’s biggest trading partners following the country’s annexation of Crimea early this year. Germany’s stagnated economy has not helped matters. Europe is keen to avoid another recession, which would be the third since 2008.

While the delay by the European Central Bank to announce an economic stimulus has caused a slip on Wall Street, the impact on the U.S job market will be determined after the November jobs report comes out on Friday. ADP, a private payrolls firm, announced that U.S companies added approximately 225,000 employees to their registers in November, causing unemployment to fall from 5.8 percent to 5.7 percent. The Labor department also reported that fewer people filed for unemployment in November. Only 297,000 applied for unemployment benefits. According to Michelle Girard and Guy Berger, economists at RBS, claims falling under the 300,000 mark are an indication that the country is experiencing solid employment growth.

By Benedicto Ateku

Sources:
New York Times
abc NEWS
Mass Live
Photo image courtesy of Daniel Petzold Photography – Flickr License

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