FRANKFURT: The European Central Bank (ECB) on Thursday (Friday in Manila) fired off a new volley of shots in its ongoing battle to avert deflation in the euro area and jumpstart economic recovery in the region.
The ECB, slashed already record-low interest rates, said it would pump massive new sums into the banking system and, for the first time, would start buying corporate bonds.
Initially, the unprecedented scale of the ECB’s action took financial markets by surprise, sparking a rise in eurozone stock markets and sending the euro lower against the dollar.
But stock prices subsequently fell back.
“Wow. In almost every respect, the ECB went beyond expectations today,” said Berenberg
Bank economist Holger Schmieding.
“The central bank came out all guns blazing,” agreed Craig Erlam, senior market analyst at Oanda.
The ECB lowered the main rate at which it lends to commercial banks—the so-called refi rate—to zero for the first time ever from 0.05 percent.
It pushed the interest rate on its deposit facility for commercial banks to -0.40 percent from -0.30 percent. This means commercial banks in fact pay the ECB if they choose to transfer their excess funds at the end of the day.
The rate on its marginal lending facility, by which the ECB offers overnight credit to banks, is going down to 0.25 percent from 0.30 percent.
The ECB also announced it would expand the volume of bonds it purchases each month under its program of quantitative easing to 80 billion euros ($88 billion) from 60 billion euros. And it would also start buying corporate bonds under the QE program.
Finally, as a way of mitigating the costs for banks, the ECB said it would roll out another new large cheap loan facility for banks, called TLTRO, to help pump liquidity into the financial system.
At his post-meeting press conference to explain the decisions, ECB President Mario Draghi pointed to a downward revision of the bank’s growth and inflation forecasts to justify the moves.
“This comprehensive package . . . has been calibrated to further ease financing conditions, stimulate new credit provision and thereby reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels below, but close to, 2.0 percent,” Draghi said.
He rejected suggestions that the single currency area had slid into deflation—a dangerous downward spiral of falling prices.
Area-wide inflation turned negative last month, with consumer prices declining by 0.2 percent.
While inflation was likely to remain in negative territory “for several months this year, by year-end it will go up again basically because of our monetary policy measures,” Draghi
“We are not in deflation.”
The ECB has been fighting to drive inflation back up to levels it believes are consistent with healthy economic growth for a number of years now, to little avail.
But Draghi insisted the bank had not used up all of its gunpowder.
“We’re not short of ammunition,” he said.
According to the ECB’s latest projections, economic growth is slower than expected and was now set to inch up to 1.4 percent in 2016, 1.7 percent in 2017 and 1.8 percent in 2018.
Inflation was also proving sticky and would come in at just 0.1 percent in 2016 and 1.3 percent in 2017, far below target.
While Draghi left the door open to further rate cuts, the new measures would help and further easing was not actually anticipated, unless facts changed to necessitate it, he said.