The European Central Bank (ECB) has delivered a surprise cut in interest rates. The move was accompanied by an announcement that it would also boost its large bond-buying programme in a bid to kickstart the eurozone economy.
The European Central Bank on Thursday cut all of its interest rates in order to head off the threat of low inflation while at the same time boosting the sluggish eurozone economy.
In addition to cutting its benchmark refinancing rate for the first time to zero, the ECB lowered the deposit rate deeper into negative territory to -0.4 percent, marking another drop by 10 basis points.
The deposit rate is the rate the ECB charges financial institutions for parking their funds at the central bank.
ECB Chief Mario Draghi said he hoped the further reduction in the deposit rate would force financial houses to stop amassing funds at the bank and instead pump the money back into the economy of the 19-member eurozone.
Investor confidence increases
Besides cutting interest rates, the ECB said it was also boosting its bond-buying program, increasing monthly asset purchases to 80 billion euros ($86.93 billion) a month from 60 billion.
The central bank announced it would also start buying corporate bonds under its quantitative easing (QE) program.
The bolder-than-expected monetary stimulus package caused European stocks to jump shortly after the ECB announcement, while the values of the euro eased against the dollar.
Economists react to ECB rate cuts
The ECB’s announcement to cut interest rates and increase its already large bond-buying program has drawn a mixed response globally. Some are worried the latest move will once again fail to achieve the desired effect.
“Following the adverse reaction to previous measures in December and in light of the growing downside risks to economic recovery, the ECB Governing Council appears to have recognized the importance of not under-delivering again,” Capital Economics analyst Jonathan Loynes said Thursday shortly after the eurozone’s central bank announced three rate cuts and a boost to its asset-purchasing program.
His view was echoed by Craig Erlam, a senior market analyst at Oanda. He said: “The central bank came out all guns blazing on Thursday.”
Berenberg Bank economist Holger Schmieding argued the ECB package of new measures “exceeds expectations by enough to have a positive confidence impact not just on financial markets, but also on business confidence in the eurozone.
Economist welcomes ECB low-interest-rate policy
A catastrophe for savers?
But not everyone seemed convinced the new ECB measures would do any good.
DZ Bank economist Jan Holthusen said the move would do little to push up inflation in a sustainable manner. He noted that the inflation rate was much more dependent on crude oil prices “which are beyond the ECB’s influence.”
“The central bank is taking the risk to do too much of a good thing,” Holthusen added.
The President of Germany’s BGA trade organization, Anton Börner, called the ECB announcement “good news for stock traders and indebted southern eurozone nations.” Those countries would now feel even less inclined to push through necessary reforms, he said.
He added the move was “a catastrophe for Germans,” saying that savers in Europe’s largest economy were being expropriated. Börner said this had “the potential of turning into a very explosive situation.”
OPINION: Draghi’s collision course
Mario Draghi is showing no mercy. Rate cuts and bond-buying haven’t gotten the eurozone out of troubled waters, but he’s staying the course. DW’s Henrik Böhme says such Titanic-esque monetary policy could sink the euro.
He’s done it again. Believe it or not, ECB Chief Mario Draghi has lowered interest rates yet again. The benchmark refinancing rate now stands at zero-point-zero percent, meaning the expropriation of savers isn’t only continuing – it’s getting worse.
The central bank’s controversial asset-purchasing program will be expanded. Instead of buying bonds worth 60 billion euros ($66.8 billion) per month, the ECB is now going to purchase 80 million euros’ worth. The program will now also entail buying corporate bonds. The bogus monetary policy of Mario Draghi continues.
Inefficient policy
The problem for Europe’s top guardian of the euro is that none of his previous measures has had a tangible, positive impact. On the contrary, inflation, which Draghi has wanted to push up by printing more and more money, still hovers around zero. And the eurozone economy isn’t really picking up much either. One issue is that companies continue holding back investments, and that’s why they don’t ask for fresh loans on a large scale.
The lenders themselves, which are awash with fresh money, can’t pass it on as they would like to. And if they want to use the ECB overnight parking facility, they have to pay for it through a negative deposit interest rate. The owners of the huge amount of cheap money available have been looking for other ways to invest as you can’t just let it rest under your pillow. The result is that big bubbles are in the process of forming, whether in the real estate market, the art market or elsewhere.
Why not buy oil, Mario?
So, what exactly is pushing Draghi to pump even more money into markets, if his plan has failed miserably thus far? According to its own rules, the ECB may not purchase more than a third of the total bond debt of a given country anyway.
And why does he stubbornly stick to an inflation target of little under 2 percent? It pretty much looks like an artificial target now, stemming from a time when a barrel of crude cost around $100. Instead of buying bonds, Baader Bank’s Klaus Stopp suggested the other day that Draghi should rather buy up oil in Rotterdam as a better long-term investment.
What about stepping down?
What Draghi is doing comes close to running amok. Cheap money destroys trust in the long term and makes people addicted. It also prompts eurozone governments to delay required reforms. The patient isn’t healed automatically by administering a greater dose of the same medication. The redistribution of money from the north to the south is continuing.
For highly indebted eurozone nations such as Spain, Portugal or Greece, Draghi’s policy is a blessing. For the eurozone as a whole the iceberg is approaching the eurozone’s Titanic fast.
Threatening letters sent by the European Commission to Madrid and Rome won’t change anything. Brussels has called for more public savings and faster reforms.
Draghi’s announcement will have pleased investors, though. European stock markets didn’t take long to jump as the junkies got an even bigger fix, although the Frankfurt Stock Exchange closed 2.3 percent down.
But if this is the only purpose of Draghi’s exercise, the Italian would be well-advised to take his leave soon.
-DW.COM
