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European Central Bank President Christine Lagarde testifies before the European Parliament's Economic and Monetary Affairs...

European Central Bank chief warns there’s little room to combat a recession

FRANKFURT, Germany (AP) — European Central Bank head Christine Lagarde has warned that the world’s central banks have less room to stimulate the economy in case there’s a recession.

Lagarde said in an appearance Thursday before the European Parliament’s economic and monetary affairs committee that interest rates and inflation are already low, meaning there is less room to reduce rates further and make credit cheaper to support business activity.

“This low interest rate and low inflation environment has significantly reduced the scope for the ECB and other central banks worldwide to ease monetary policy in the face of an economic downturn,” she said.

The ECB has already reduced key policy rates to zero or below. The benchmark rate for lending to eurozone banks is at zero, and the rate on deposits left at the ECB by banks overnight is at minus 0.5%. The negative rate costs banks money and gives them an incentive to lend the money instead of letting it pile up. The U.S. Federal Reserve is holding its benchmark federal funds rate at a range of 1.5-1.75%.

Lagarde has urged European governments that are in good financial shape to use government spending to support the economy and not rely so much on stimulus from the central bank.