World Economy

ECB to Boost Inflation, Encourage More Lending

ECB to Boost Inflation, Encourage More Lending ECB to Boost Inflation, Encourage More Lending

The European Central Bank has unleashed new stimulus for the eurozone economy, cutting a key deposit rate and extending an asset-buying program in a bid to boost inflation and encourage more lending by banks.

The European Central Bank extended its bond-buying scheme known as quantitative easing on Thursday, pushing back the date the program is meant to expire to March 2017 from September of next year, DW reported.

While ECB President Mario Draghi kept the ceiling of monthly bond purchases unchanged at €60 billion ($65.2 billion), he left open the possibility of lengthening the scheme’s duration even further should the need arise.

“Our asset purchase program is flexible,” Draghi told reporters in Frankfurt. “It can always be adjusted.”

Financial markets did not hide their disappointment that the central bank would not be doing more to stimulate the eurozone’s economy.

“We are not sure why, having promised so recently to be focused on the external risks to the eurozone economy, the ECB was willing to disappoint the markets in this way,” Alastair George, Chief Strategist at Edison Investment Research, told the Reuters news agency.

Draghi’s dovish decision, which Alastair derided as “another damp squib”, pushed Europe’s top shares to their biggest fall in four months. The FTSEurofirst 300 dropped 3.3% to 1,462.76 points, while the Euro STOXX 50 and Germany’s DAX dipped 3.6% respectively.

  Nudge Politics

Draghi said he hadn’t added more to that program because he thought an extension and a promise to reinvest payments in the scheme would be enough. The ECB is now also going to include regional and local debt in its purchases, providing it is denominated in euros.

Earlier in the day, the ECB also lowered its key deposit rate to -0.30% from -0.20%, making it even more expensive for banks to keep their money parked at the central lender.

A negative deposit rate is meant to encourage banks to put money into general circulation by issuing loans, thereby facilitating growth and inflation. Under normal circumstances, banks earn money on their deposits at the ECB.

The ECB held its other two key interest rates, the refi and the marginal lending rates, unchanged at 0.05% and 0.30% respectively.

Two weeks ago, Draghi declared the central bank would “do what we must” to ensure that the 19-member eurozone remained on a path of economic growth. He pledged to drive consumer prices back up towards the bank’s annual inflation target of just below 2%.

But data released Wednesday showed eurozone inflation remained stuck near zero as prices of goods and services in November rose by a mere 0.1% compared to the same month a year earlier.

Draghi also said the bank was lowering its eurozone inflation forecast for the next two years. In 2016, that rate is expected to reach 1% rather than 1.1%. The year after, consumer prices are seen rising by 1.6%, down from 1.7%.

  Oil to Blame?

The latest interest rate moves are sure to stoke criticism from the opponents of the ECB’s ultra-low monetary policy, led by the two German members on the bank’s rate-setting Governing Council. They have repeatedly stressed that Europe’s recovery is gaining strength and that the biggest reason inflation is hovering near zero is the fall in oil prices, which is actually a boost for growth.

In addition, German banks are most affected by the cut in the deposit rate as they have nearly €160 billion of excess cash parked at the central bank, according to Barclays Research estimates.

The French and Dutch banking sectors each sit on more than €100 billion of excess cash, compared to less than €20 billion each for their peers in Ireland, Spain and Italy.

Critics also argue the ECB should not yet exhaust its full monetary firepower amid an improving eurozone economy, but rather save some of it for more dire economic straits later.