Friday

22nd Sep 2017

ECB tries to jumpstart economy with historic move

  • Mario Draghi - The ECB's move, though predicted, is unprecedented (Photo: World Economic Forum)

The European Central Bank has taken the major step of introducing negative interest rates for bank deposits as it tries to jumpstart eurozone economies.

On Thursday (5 June) it became the first major central bank (among the US Federal Reserve, the Bank of Japan and the Bank of England) to effectively charge central banks for parking money with it rather than lending it out.

Thank you for reading EUobserver!

Subscribe now and get 40% off for an annual subscription. Sale ends soon.

  1. €90 per year. Use discount code EUOBS40%
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

The ECB also cut its main interest rate from 0.25 percent to 0.15 percent and promised further steps if needed.

"Today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy," said ECB chief Mario Draghi.

"We think it's a significant package," said he said and went on adding an equivalent of his famous 'whatever it takes' phrase saying: "Are we finished? The answer is no. We are not finished yet,"

The moves came after eurozone inflation fell to 0.5 percent in May with the ECB's main task to keep inflation at or close to 2 percent.

The low rate has prompted fears that the euro area will enter into a period of deflation, or falling prices, but Draghi said the bank's governing council "don't see this".

Draghi said that the bank was prepared to use "unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation."

The ECB held back from quantitative easing - buying government bonds and other securities to increase lending - but agreed to have longterm loans at reduced rates until 2018.

It is also doing "preparatory" work on buying bundles of loans made to small businesses.

After the announcement the euro plunged to $1.3558, its lowest level in four months.

The reaction from Germany where commentators have been accusing Draghi of attacking Geman savers was strong.

Ralph Brinkhaus, the vice chair of the governing CDU's parliamentary faction, said the ECB was sending the wrong signal.

"The key to overcoming the economic crisis is a policy of sustainable structural reform and not a policy of low interest rates," he said, according to Handelsblatt.

Speaking about the rates decision, ING bank chief economist Carsten Brzeski was downbeat in his assessment of whether it work.

"Will it help to kick-start the economy? Probably not, but at least it demonstrate the ECB’s determination and ability to act," he said.

Meanwhile, asked on whether the stronger anti-EU vote of the recent EP election would make it harder for governments to push through tough reforms, Draghi said the result is a "good reason for deep reflection."

He noted that it is time to think about how the EU can deliver "prosperity and jobs" and chastised governments for focussing too much on consolidation rather than also on higher public investment and structural reform.

Draghi sceptical on German bank union plan

ECB boss Draghi has voiced scepticism on a German-led compromise on banking union, saying it could create a regime "that is single in name only."

Opinion

Why America is recovering, but Europe is not - Part II

It is the differences in the way the United States and Europe tackled the global financial crisis that explains why the US economy is recovering, whereas the eurozone is amid a lost decade.

Don't touch EU stability pact, warns ECB's Draghi

ECB boss Mario Draghi urged EU leaders not to meddle with the bloc's rules on debt and deficits on Monday, warning that it could turn the tide on much needed economic reforms.

EU takes time to ponder tech giant tax

The EU commission published a paper that outlined several options on how to increase tax income from internet companies' activities, but fell short of proposing legislation.

Investigation

EU bank accused of muzzling watchdog

An ongoing review of the the European Investment Bank's "complaints mechanism" could make the oversight branch less independent and less effective.

Stakeholders' Highlights

  1. Mission of China to the EUGermany Stands Ready to Deepen Cooperation With China
  2. World VisionFirst Ever Young People Consultation to Discuss the Much Needed Peace in Europe
  3. European Jewish CongressGermany First Country to Adopt Working Definition of Antisemitism
  4. EU2017EEFour Tax Initiatives to Modernise the EU's Tax System
  5. Dialogue PlatformResponsibility in Practice: Gulen & Islamic Thought
  6. Counter BalanceHuman Rights Concerns Over EIB Loan to the Trans Anatolian Pipeline Project
  7. Mission of China to the EUChina Leads the Global Clean Energy Transition
  8. CES - Silicones EuropeFrom Baking Moulds to Oven Mitts, Silicones Are a Key Ingredient in Kitchens
  9. Martens CentreFor a New Europeanism: How to Put the Motto "Unity in Diversity" Into Practice
  10. Access MBAGet Ahead With an MBA Degree. Top MBA Event in Brussels
  11. Idealist QuarterlyIdealist Quarterly Event: Building Fearless Democracies With Gerald Hensel
  12. Mission of China to the EUPresident Xi Urges Bigger Global Role for Emerging Economies