Monday

5th Jun 2023

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.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

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."

EU sneaks in bleak economic report

Annual country reports published Friday afternoon by the European Commission highlight challenges ahead for the EU economy.

ECB brushes off German criticism

"We obey the law, not the politicians," the president of the European Central Bank, Mario Draghi, said after German finance minister criticised its anti-inflation policies.

Opinion

The never-ending crisis of European leadership

European leaders need to confront extremist populism with a clear-cut solution leading to economic growth and improved living standards or risk disintegration - a view from the US.

'Be patient,' ECB chief tells Germany

European Central Bank president Mario Draghi keeps interest rates low and answers German criticism by saying they were in everyone's interest.

EU: national energy price-spike measures should end this year

"If energy prices increase again and support cannot be fully discontinued, targeted policies to support vulnerable households and companies — rather than wide and less effective support policies — will remain crucial," the commission said in its assessment.

Opinion

EU export credits insure decades of fossil-fuel in Mozambique

European governments are phasing out fossil fuels at home, but continuing their financial support for fossil mega-projects abroad. This is despite the EU agreeing last year to decarbonise export credits — insurance on risky non-EU projects provided with public money.

Latest News

  1. Asylum and SLAPP positions in focus This WEEK
  2. Spanish PM to delay EU presidency speech due to snap election
  3. EU data protection chief launches Frontex investigation
  4. Madrid steps up bid to host EU anti-money laundering hub
  5. How EU leaders should deal with Chinese government repression
  6. MEPs pile on pressure for EU to delay Hungary's presidency
  7. IEA: World 'comfortably' on track for renewables target
  8. Europe's TV union wooing Lavrov for splashy interview

Stakeholders' Highlights

  1. International Sustainable Finance CentreJoin CEE Sustainable Finance Summit, 15 – 19 May 2023, high-level event for finance & business
  2. ICLEISeven actionable measures to make food procurement in Europe more sustainable
  3. World BankWorld Bank Report Highlights Role of Human Development for a Successful Green Transition in Europe
  4. Nordic Council of MinistersNordic summit to step up the fight against food loss and waste
  5. Nordic Council of MinistersThink-tank: Strengthen co-operation around tech giants’ influence in the Nordics
  6. EFBWWEFBWW calls for the EC to stop exploitation in subcontracting chains

Stakeholders' Highlights

  1. InformaConnecting Expert Industry-Leaders, Top Suppliers, and Inquiring Buyers all in one space - visit Battery Show Europe.
  2. EFBWWEFBWW and FIEC do not agree to any exemptions to mandatory prior notifications in construction
  3. Nordic Council of MinistersNordic and Baltic ways to prevent gender-based violence
  4. Nordic Council of MinistersCSW67: Economic gender equality now! Nordic ways to close the pension gap
  5. Nordic Council of MinistersCSW67: Pushing back the push-back - Nordic solutions to online gender-based violence
  6. Nordic Council of MinistersCSW67: The Nordics are ready to push for gender equality

Join EUobserver

Support quality EU news

Join us