The European Central Bank (ECB) has moved aggressively in an attempt to stimulate the economy of the Eurozone in a move that caught many markets by surprise- mainly because past efforts have fallen short of expectations. This is the bank’s second intervention this year.
The bank has announced what it believes are a “comprehensive” package of measures which includes interest rate cuts, an expanded quantitative easing (QE) programme and cheap loans for banks.
The ECB’s move is undoubtedly a bold one, and one which aims to tackle weak inflation and spur activity. Announcing the policies, the bank’s president, Mario Draghi stated that:
“This comprehensive package… has been calibrated to further ease financing conditions, stimulate new credit provision and therefore reinforce the momentum of the euro area’s economic recovery and accelerate the return of inflation to levels (near) 2%”.
The current level of inflation stands at an annual rate of -0.2% and the latest policy moves have seen the euro’s value plunge 1% against the dollar. It also experienced a slight fall against the pound.
In a move that surprised many in the financial markets, the ECB’s main refinancing rate was also cut to zero from 0.05%, too.
Additionally, the ECB trimmed its overnight deposit rate further into negative territory, to -0.4% from -0.3% in a bid to encourage bank lending by charging lenders more money to deposit cash with the ECB itself.
The bank has also made the decision to expand its bond-buying. This will be upped to €80bn per month; an increase of €20bn from the current €60bn level. It is hoped that this will improve money supply in the economy. The ECB added that its asset purchases would include non-bank corporate bonds for the first time, too.
Finally, there was also the promise from the ECB that there would be a new cheap round of loans for banks (which would be known as TLTRO). These are scheduled to begin in June 2016.
Few people expected the ECB’s announcement to be as major as it was – particularly as it’s their second intervention of the year. However, it’s become quickly apparent that a major intervention is required to help tackle weak inflation.