ECB seeks new tools while Fed toys with exit

The European Central Bank is looking into expanding its range of policy tools, while the US central bank is mulling scaling back its support measures, highlighting the contrasting fortunes between the world's two biggest economic blocs. ECB Executive Board member Peter Praet said late on Wednesday that the central bank could try new policies if needed to battle deflation risks, adding that the central bank was also weighing measures to encourage more lending in the euro zone.
Firms and consumers in the 17-country bloc face widely varying loan costs, with crisis-ravaged southern European countries inflicted with high interest rates despite record-low policy rates set by the ECB - a major headache for the central bank. Praet said deleveraging by the region's banks could hurt growth and push euro zone inflation too low - it has already dropped to 1.2 percent, well below the target of close to but below two percent - and that the ECB would move to avoid a deflationary spiral if necessary.
"We have an objective: price stability," he said. "If that objective is at risk, we have the possibility ... to expand the range of (monetary policy) instruments if we think it's necessary for that objective," he said. While deflation, or persistently falling prices, remains outside the ECB's mainline scenario, Praet's comments indicate it is taking the risk seriously.
His fellow policymaker, Governing Council member Christian Noyer, also said the ECB was considering new measures to tackle differences in financing conditions across the euro zone. "We are currently considering the possible introduction of additional monetary instruments that could further reduce financial fragmentation," Noyer told a conference in Paris on Thursday.
In contrast, US Federal Reserve Chairman Ben Bernanke said the Fed could decide to scale back the $85 billion in bonds it buys each month at one of its "next few meetings" if the economy maintained momentum. Monetary stimulus was helping the economy recover, Bernanke told Congress on Wednesday, but added that the central bank needs to see further signs of traction before taking its foot off the gas pedal.
The US economy regained speed in the first part of the year while the euro zone languished in recession for the sixth straight quarter, and business surveys indicated on Thursday that the April-June period could make it seven as weakness spreads to the core countries, especially France. With the euro zone stuck in recession, the ECB cut its main refinancing rate to a record low of 0.5 percent this month and extended its provision of unlimited funds to banks by a year.