In World Economy News 11/03/2016
The European Central Bank can cut interest rates further but isn’t likely to, Mario Draghi said after unveiling stimulus on Thursday that brought borrowing costs to record lows, expanded asset purchases and offered a borrowing subsidy to lenders.
“It’s a fairly long list of measures, and each one of them is very significant and devised to have the maximum impact in boosting the economy and the return to price stability — we have shown we are not short of ammunition,” the ECB president told reporters in Frankfurt after a two-day meeting of the Governing Council. “From today’s perspective, we don’t anticipate it will be necessary to reduce rates further.”
The steps mark a dramatic expansion of the central bank’s stimulus program after a disappointing remodeling was panned by investors in December. The intensification of the fight to prevent the 19-nation euro area’s lackluster economy from slipping into a deflationary spiral came just days after data showed the inflation rate is once again below zero despite a whole year of quantitative easing.
The euro whipsawed as Draghi spoke, falling as he repeated guidance that rates can go lower, and then strengthening as he explained that more cuts might not be needed, given the breadth of the ECB’s measures. That package included a 10 basis-point cut in its deposit rate to minus 0.4 percent, a surprise drop in the benchmark to zero, a pledge to buy corporate debt as part of 80 billion-euros ($88 billion) of monthly QE purchases — 20 billion euros more than at the moment — and four more multi-year lending operations.
The single currency was 1.2 percent stronger at $1.1126 at 4:10 p.m. in Frankfurt, after falling as much as 1.6 percent earlier.
Even though the central bank is increasing the amount that lenders pay when they park funds overnight, Draghi said the Governing Council decided against introducing a tiered deposit rate that could shield banks from the full effects.
“The final decision on not having a tiering system, was not only the desire not to signal that we can go as low as we want, but also the complexity of the system,” Draghi said. “The Governing Council is increasingly aware of the complexity that this measure entails.”
Bank executives have railed against the entrenchment of negative rate policies at the ECB and elsewhere, arguing that they depress profits and could end up being counterproductive.
“Negative rates are killing the banks but they may think it is worth it if they can help growth,” said Erik Nielsen, chief economist at UniCredit Bank in London, adding that it is “good news” that the ECB has decided to buy corporate debt. “For QE to be effective, they have to go out the risk curve.”
Forecasts Lowered
Draghi’s emboldened support for the economy is set against the backdrop of a falling consumer prices in the euro area — a 0.2 percent drop in February, far below the ECB’s inflation goal of of just under 2 percent — and a global outlook where uncertainty is a dominant factor. China’s long-term economic transition to a consumption-led model is being accompanied by slower growth rates that are being felt in the rest of the world, at the same time as major emerging markets like Russia and Brazil remain in recession.
The package “is an adequate reaction to a weakening of the growth and price-stability prospects,” Draghi said. “We think the measures we took today are adequate to address the change in economic conditions that occurred since our last monetary policy meeting.”
Draghi said inflation is expected to remain negative in the coming months and “to pick up later in 2016.” The central bank slashed its inflation forecast for this year to 0.1 percent from 1 percent predicted in December. The rate will then gradually increase to 1.3 percent in 2017 and 1.6 percent in 2018, Draghi said.
Global Drag
The growth outlook was also lowered, reflecting weaker international prospects. Gross domestic product will expand 1.4 percent this year, lower than a previous forecast of 1.7 percent. In 2017, an expansion of 1.7 percent is predicted.
Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets eligible for regular purchases under QE. Draghi said the Governing Council hasn’t yet decided the technical details of that program.
The ECB’s new round of targeted refinancing operations will start in June. The central bank said the interest rate “can be as low as the interest rate on the deposit facility,” meaning the institution could end up paying banks to take loans from it.
New Era
Draghi defended the central bank’s bold action, saying they’ve moved beyond the “nein zu allem — no to everything” mentality expressed by some members of the euro area.
“In order to get to our objective we need a stable and solid recovery in the euro area — you’ll see the output gap will close down and then we’ll see movement on wages and prices,” he said. “The counterfactual would have been disastrous deflation.”
