Monday

25th Jul 2016

Deflation fears trigger ECB's 'bazooka'

  • Draghi: "We have shown we are not short of ammunition" (Photo: ECB)

The European Central Bank (ECB) once again on Thursday (10 March) used its "bazooka" of dramatic measures to try to revive the European economy threatened by slowing growth, global uncertainties and a new risk of deflation.

The objective was also psychological, as the ECB chief Mario Draghi tried to convince market watchers of the effectiveness of policies that have so far failed to produce decisive results.

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The ECB decided to raise from €60 billion to €80 billion the amount of bonds it will buy each month in order to pump more money into the economy. The asset-buying programme known as quantitative easing will now include bonds issued by non-bank corporations.

In another move with symbolic implications, the ECB decided to reduce the rate on bank, states and institutions deposits to the ECB further into the negative, from -0.3 percent to -0.4 percent.

The interest rate on the main refinancing operations, by which the ECB lends money to banks for a week, is lowered to 0.00 percent, down from 0.05 percent. The rate for the marginal lending facility, the overnight credit to banks, is down from 0.30 percent to 0.25 percent.

"It's a fairly long list of measures," Draghi said at a press conference at the ECB headquarters in Frankfurt.

He assured that "each one of them was very significantly devised to have a maximum impact into boosting the economy and a return to price stability".

Ammunition

"We have shown we are not short of ammunition," he said, telling critics that the decision made " full justice of doubts about [the bank's] willingness to act".

Despite the display of confidence, Draghi and the governing council of the eurozone central bank acted under the pressure of the degrading perspectives of the EU economy.

The ECB revised downward its growth forecasts to 1.4 percent this year, 1.7 percent in 2017 and 1.8 percent in 2018. In December it was expecting 1.7 percent in 2016 and 1.9 percent in 2017.

The other concern is weak inflation, mainly caused by falling energy prices, that could lead to lasting falling prices and wages.

While the year-on-year inflation was negative in February, at -0.2 percent, the ECB now forecasts a 0.1 percent inflation rate in 2016, far below the 1 percent rate it expected in December.

To counter pessimism, Draghi assured that Europe was "not in deflation" and that although inflation was negative at the moment, it would "go up again, basically because of [the ECB] policy measures".

Reform efforts

Moe than a year after the ECB launched its quantitative easing programme and three months after it lowered the deposit rate with no improvement of the eurozone prospects, Draghi justified his action as a balancing act.

If the bank had done nothing, he said, "we would have been in a disatrous deflation". On the other hand, he denied having had an "overreaction to lower oil prices" and explained that lower global growth prospect and a tightening of financing made new measures necessary.

While expressing the ECB's resolve, he said it did not consider necessary to further reduce rates. He however specified that "new facts can change the outlook".

Once again, Draghi made clear he did not intend to be the sole person in charge of keeping the eurozone on track and called on member states to do their homework.

"As indicated by the European Commission, the implementation of country-specific recommendations continued to be fairly limited in 2015," he noted in his presentation of the measures taken.

"Reform efforts thus need to be stepped up in the majority of euro area countries. Fiscal policies should support the economic recovery, while remaining in compliance with the fiscal rules of the European Union."

The ECB chief insisted that "full and consistent implementation of the Stability and Growth Pact is crucial to maintain confidence in the fiscal framework. At the same time, all countries should strive for a more growth-friendly composition of fiscal policies."

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