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Ukraine looms over European Central Bank meeting

By David Mchugh

Associated Press

Published: Wednesday, Aug. 6 2014 1:09 p.m. MDT

Updated: Wednesday, Aug. 6 2014 1:09 p.m. MDT

In this July 31, 2012 file photo the euro sculpture stands in front of the headquarters of the European Central Bank, ECB, in Frankfurt, Germany.

Michael Probst, File, Associated Press

Enlarge photo»

FRANKFURT, Germany — The crisis in Ukraine and a hesitant recovery in Europe are casting shadows over the European Central Bank's meeting Thursday.

Economists say the monetary authority for the 18 countries that use the euro will look to reassure markets that it is ready to add more stimulus measures if the economy takes a serious turn for the worse.

But the 24-member governing council isn't expected to act just yet.

It approved a major package of measures in June including a cut in the main interest rate to a record low 0.15 percent and an offer of more extra-cheap credit to banks. Now it is waiting to see how those work.

If further measures are deemed necessary in the future, analysts say the bank could decide to purchase large amounts of financial assets such as government bonds in the open market, a step which can drive rates down further and add newly created money to the economy. But that's a drastic step — and analysts say the bank will only use it if its current efforts don't work as expected.

One risk factor is a sudden shock to business and investor confidence if the conflict between Russia and Ukraine escalates. NATO says Russia has some 20,000 troops massed on Ukraine's border as Ukrainian forces battle pro-Russian separatists.

A further intensification of fighting or outright invasion by Russia could lead the European Union and United States to impose new sanctions on Russia, disrupting trade. Uncertainty over what the impact could be on the global economy and markets could make businesses hold off on investing and consumers on spending — not what the modest recovery needs right now.

Other recent signs have been mixed. Surveys of purchasing managers point up. But Italy's economy, the eurozone's third-largest, slid into recession in the second quarter, shrinking by 0.2 percent after a 0.1 fall in the first quarter. Two straight quarters of contracting output is one common definition of recession.

Low inflation is another worry for the ECB, at only 0.4 percent in the year to July. Too-low inflation has raised fears the eurozone may slip into outright deflation, a crippling downward price spiral in which people postpone purchases because they think goods will become cheaper.

Economist Christian Schulz at Berenberg Bank said the ECB will keep asset purchases — also known as quantitative easing — in reserve so it will have a powerful tool to use if Russian President Vladimir Putin escalates the conflict.

"Putin, not low inflation, is the real risk to the eurozone," he said.

ECB President Mario Draghi has indicated that asset purchases are possible in the future. His words have helped the ECB on one front at least — getting the euro exchange rate lower. On Wednesday, it fell to a nine-month low against the dollar of $1.3333.

The prospect of more money being created through a monetary stimulus is one of the reasons why the euro has been in retreat over the past couple of months. That's good news for the ECB as it helps make exports cheaper — good for growth — and raises the price of imports — good for inflation.

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