This content is not available in your region

ECB cuts borrowing costs, plans asset buying to stimulate eurozone growth

ECB cuts borrowing costs, plans asset buying to stimulate eurozone growth
Text size Aa Aa

Trying to revive the flagging eurozone economy, the European Central Bank has again cut the cost of borrowing.

It also plans to push billions into the economy by so-called unconventional means – buying securities from banks.

Those are ABS, or asset backed securities, created by high street banks bundling together mortgages and other loans.

ECB President Mario Draghi said they are focused on avoiding deflation and economic stagnation across the eurozone: “Today’s decisions – together with the other measures in place – have been taken with a view to underpinning the firm anchoring of medium- to long-term inflation expectations in line with our aim of maintaining inflation rates below, but close to, 2.0 percent.

He told reporters there is support for more stimulus if needed: “Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.”

The ECB’s main interest rate has dropped to a new record low, 0.05 percent from 0.15 percent previously, as the region’s recovery lags behind other major world economies.

Euronews got more insight from Portuguese analyst Rui Bàrbara with Banco Carregosa who explained: “The unconventional part consists of the European Central Bank allowing ordinary banks, retail banks, throughout the euro area to sell these asset-backed securities, which are basically loans that have been converted into financial products.”

Asked about the risk of repeating the 2008 financial crisis he said: “We are very far from a housing bubble here in Europe, indeed the situation is exactly the opposite as the banks are not giving out mortgages.”

The interest rate cut, the ABS purchases and the ECB’s long-term low interest loans to banks are necessary because inflation is now forecast to be just 0.6 percent this year, way below the central bank’s around two percent target.

The question still remains will eurozone banks use the money to lend to businesses and individuals to create growth?

Or will the ECB have to bring out the big guns – printing yet more money to buy government bonds in large quantities through what is known as quantitative easing?

The US Federal Reserve and Bank of England have done that, but they were buying their own bonds.

The German government is known to be strongly opposed to the idea of buying the sovereign bonds of other economically troubled eurozone countries such as Spain, Italy, Portugal or even France.