Mixed reviews for European Central Bank stimulus moves

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Mixed reviews for European Central Bank stimulus moves

Mixed reviews for European Central Bank stimulus moves
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Trying to stimulate growth and reverse too low inflation, the European Central Bank has cut the cost of borrowing to a record low and announced measures to persuade banks to lend more to businesses and individuals.

ECB President Mario Draghi unveiled 400 billion euros worth of long-term low-interest loans to commercial banks.

In addition those banks will no longer receive any interest when they leave money on deposit with the ECB. Indeed with the negative deposit rate that has been introduced they will have to pay interest of 0.1 percent.

Draghi told a news conference: “Today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy.”

Since taking office, Draghi has overseen a series of interest rate cuts; the benchmark rate has fall from 1.0 percent in December 2011 to 0.15 percent from 11 June.

Policymakers stopped short of large-scale asset purchases for now, but Draghi said more action could come. “If required, we will act swiftly with further monetary policy easing,” he said, adding that the policy-setting ECB Governing Council was unanimous in its commitment to use unconventional instruments if needed “to further address risks of too prolonged a period of low inflation”.

German anger

Critics say the rate cut and the other measures are not enough to return the sluggish eurozone economy to health.

The strongest criticism has come from Germany, which has escaped the European debt crisis relatively unscathed.

Low rates are unpopular in Germany, Europe’s biggest economy, because they are seen as penalising savers.

There the government is uneasy, Finance Minister Wolfgang Schaeuble has said low interest rates are not a long-term solution.

Conservative German economist Hans-Werner Sinn of the Ifo institute said the ECB’s moves smacked of desperation and would not work.

“This is a desperate attempt – with ever cheaper money and penalty rates on deposits – to shift capital flows to southern Europe in order to stimulate growth there,” he said.

German Chancellor Angela Merkel declined comment, noting that the ECB took its decisions independently of governments.

In Cologne, a couple of bank customers who were interviewed were incensed.

One man blamed the banks saying that they can borrow at very low interest rates but those who lose out are the savers. “Something must be done,” he concluded.

Another customer said he has given up saving altogether and does not have one cent invested with a bank. He added: “After all I’ve gone through in this country – I’ve wised up.”

‘Time for reform’

On the plus side Eurogroup head Jeroen Dijsselbloem said the package of stimulus measures was “certainly helpful”, but the steps did not take away the obligations on countries to reform.

“We still have to do a lot ourselves,” he told an EU seminar in London. The rate cuts could “buy more time” to complete economic reforms and this time should not be wasted.

“The ECB is providing stimulus and that will help the global economy. It’s a powerful force in keeping world interest rates low,” said Kathy Jones, fixed income strategist at Charles Schwab in New York. “Draghi delivered.”

As well as a bid to get credit flowing, the ECB measures are aimed at keeping the eurozone from a spiral of falling prices leading to slowing growth and consumption.

The bank’s inflation forecast was lowered to just 0.7 percent for all of this year – far below the ECB target of 2.0 percent – though Draghi insisted we are nowhere near deflation of the kind which froze Japan’s economy for so long.

with Reuters