Thursday

25th Aug 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.

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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.

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