ECB delivers another adrenaline shot to eurozone economy

Frankfurt: The European Central Bank brought out the heavy artillery Thursday to jumpstart the stalled eurozone economy, slashing already record-low interest rates, pumping massive new sums into the banking system and, for the first time, buying corporate bonds.

The unprecedented scale of the ECB’s action took financial markets by surprise, sparking a dramatic rise in eurozone stock markets and sending the euro lower against the dollar.

“The central bank came out all guns blazing on Thursday, cutting rates across the board and increasing both the size of the quantitative easing program and the list of eligible assets,” said Craig Erlam, senior market analyst at Oanda.

The ECB said it is cutting its central “refi” refinancing rate to zero percent from 0.05 percent previously.

 

The rate on its marginal lending facility is going down to 0.25 percent from 0.30 percent and on the deposit facility to minus 0.40 percent from minus 0.30 percent.

The ECB also announced it would expand the volume of bonds it purchases each month under its programme of quantitative easing to 80 billion euros from 60 billion euros. And it would also start buying corporate bonds under the QE programme.

Finally, the central bank said it would roll out another new large cheap loan facility for banks, called TLTRO, to help pump liquidity into the financial system.

The raft of new measures were more than analysts had been expecting.

“Following the adverse reaction” to previous measures in December, “and in light of the growing downside risks to the recovery, the governing council appears to have recognised the importance of not under-delivering again,” said Capital Economics economist Jonathan Loynes.

Moves announced by the ECB back in December had been perceived by the financial markets to be half-hearted.

“All told, the ECB deserves credit for learning from its mistake in December. But there is no guarantee that its latest ‘bazooka’ will be any more effective than previous ones” in securing strong and sustained enough growth to eliminate the threat of deflation in the currency union, Loynes said.

“The ECB has belatedly delivered, but it can’t work miracles,” he warned.

With area-wide falling inflation back into negative territory in February for the first time in five months — it fell to minus 0.2 percent — and eurozone growth not expected to pick up speed any time soon, the case for further stimulus measures had been clear.

“It will be interesting to see how Draghi will address recent criticism on the effects of the ECB’s monetary policy and whether he can give the markets the feeling that the ECB indeed is almighty and powerful and not impotent,” said ING DiBa economist, Carsten Brzeski.

Berenberg Bank economist Holger Schmieding said the 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.”

In the absence of any new shock such as potential decision by Britain to leave the EU, “the package will help to get the eurozone back to trend growth of annualised rates around 1.6 percent by mid-2016,” Schmieding said.

“If so, it will over time serve to lift domestically generated inflation closer to the ECB’s target of close to but below 2.0 percent,” the expert said.

The deposit rate is the interest the ECB usually pays banks for the excess funds they place at the central bank overnight.

But it has been negative since June 2014, meaning the ECB effectively charges the banks for using the facility, in the hope that banks will instead lend the funds out to businesses and companies to get the economy moving.

However, banks complain the currently ultra-low interest rate environment, eroding profits and pushing the deposit further into negative territory, could harm them further still.

The powerful German banking federation BdB is opposed to opening up the monetary sluice gates still further, insisting it will not provide any additional boost to economic growth.

“On the contrary, additional expansionary measures will do more harm than good,” it said on Wednesday.

“We currently see no deflationary dangers whatsoever. The ECB is exaggerating the risks and acting too mechanistically,” said BdB chief Michael Kemmer.