ECB cuts rate even further below zero
Stimulus likely to have small effect on eurozone’s economy
The European Central Bank on Thursday trotted out more of its monetary-policy artillery in a bid to jump-start the eurozone’s sluggish economy and head off persistent deflation, but the impact will likely be more akin to a pellet gun, economists say.
While its new stimulus measures will likely have some positive effects, they don’t address the deeper capital problems that prevent the region’s beleaguered banks from increasing lending and the need for more government spending.
“It will be a small net positive,” IHS Chief Economist Nariman Behravesh says. And with financial markets largely expecting the moves, “It is something they had to do” to avoid a sharp stock sell-off.
Still, although European markets initially rallied on the ECB news, stocks there did an aboutface and closed sharply lower.
The ECB cut its key deposit rate for banks further below zero, to -0.4% from -0.3%. That means banks must pay even more to park their money at the central bank — instead of earning interest, as they would in normal times — theoretically spurring them to lend more.
The ECB also increased its monthly bond purchases to 80 billion from 60 billion euros through March 2017, pumping more cash into the banking system and pushing down long-term interest rates.
And the central bank cut its main interest rate on loans to banks to zero from 0.05% and offered a new round of longer-term loans that could allow banks to effectively be paid to borrow money and lend it to consumers and businesses.
Those measures too are aimed at coaxing banks into opening the lending spigots and making borrowing dirt-cheap for customers.
Both the increased asset purchases and negative interest rates should also further weaken the euro, boosting the region’s exports, and prod investors to move money to stocks, lifting markets.