Monday

5th Dec 2016

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.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

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.

Analysis

Doubts hang over EU investment plan's future

Questions of value for money and a lack of transparency complicate adding almost €200 billion more and extending the Juncker investment plan to 2020.

News in Brief

  1. EU dismisses euro crisis risk after Italian referendum
  2. Italy result poses no risk to the EU, Sapin says
  3. EU asked to clarify links to Iran executions
  4. Italian economy minister tipped as caretaker PM
  5. EU tells US tech giants to act faster against hate speech
  6. Iceland's Pirates in bid to form government
  7. Danes are the happiest workers, study says
  8. Talks on wholesale roaming rules to start

Stakeholders' Highlights

  1. European Jewish CongressWelcomes Result of Austrian Presidential Election
  2. CESICESI Congress Focuses on Future of Work, Public Services and Digitalisation
  3. European Gaming & Betting AssociationAustrian Association for Betting and Gambling Joins EGBA
  4. ACCAWomen of Europe Awards: Celebrating the Women who are Building Europe
  5. European Heart NetworkWhat About our Kids? Protect Children From Unhealthy Food and Drink Marketing
  6. ECR GroupRestoring Trust and Confidence in the European Parliament
  7. UNICEFChild Rights Agencies Call on EU to put Refugee and Migrant Children First
  8. MIRAIA New Vision on Clean Tech: Balancing Energy Efficiency, Climate Change and Costs
  9. World VisionChildren Cannot Wait! 7 Priority Actions to Protect all Refugee and Migrant Children
  10. ANCI LazioRegio-Mob Project Delivers Analysis of Transport and Mobility in Rome
  11. SDG Watch EuropeCivil Society Disappointed by the Commission's Plans for Sustainable Development Goals
  12. PLATO15 Fully-Funded PhD Positions Open – The Post-Crisis Legitimacy of the EU (PLATO)

Latest News

  1. No euro crisis after Italian vote, says EU
  2. Austrian far-right: beaten, but not defeated
  3. Czech, Slovak MEPs 'shocked' by EU comments on Castro
  4. Italy and visa-free travel on EU agenda This WEEK
  5. Italy referendum spooks eurozone
  6. Optimistic liberals look for more influence
  7. What the EU will learn from Trump's Taiwan blunder
  8. Liberals ponder Verhofstadt's chances for parliament top post