ECB acts decisive in deflation threat

Photo: Lennart Rikk

Even before stepping into office, European Central Bank president Mario Draghi was nicknamed Super Mario. Now, nearly three years into his term, the ECB council under his leadership has managed to act decisive on several occasions. For starters, two years ago, eurozone was saved from breaking apart, or, at least, from a very bad crisis. Now, the central bank is set to do battle for boosting economy and defeating deflation.

Namely, the council opted to lower base interest rate down to 0.15 percent, and the deposit interest to minus 0.10 percent. Meaning that commercial banks desiring to have deposits at ECB must pay interest for it. That, of course, will not mean that commercial banks would pour the negative interest onto households and enterprises, for then we would take our money out.

Even so, it can’t be excluded that the negative interest may be passed on to other interest products of customers – the non-existent deposit interest rates may sing even lower; or perhaps they’ll raise debt interest margins.  

This will have an effect on conservative pension funds and other conservative investment products.

Meanwhile, this should be joyful tidings to those with loans: as expected, the six month Euribor – base interest for long-term loans – will drop somewhat. According to Swedbank chief economist Tõnu Mertsina, a larger interest drop may still not materialise: earlier interest cuts did not ease credit offer too much.

The lowering of base interest and the negative deposit interest did not come as a surprise. Rather, the base interest rate was left somewhat higher than was expected, as, according to analysts, the central bank ought to fight the deflationary spiral.

«Deflation is as bad as fast inflation, as consumers will be postponing their purchases, and some companies will have to cut salaries,» Swedbank Lithuania chief economist Nerijus Mačiulis told Postimees, a couple of days ago. «That’s the Japanese scenario – the downward spiral of prices and wages that no one wants.»

At the post-meeting press conference, Mario Draghi said he did not see a direct deflation threat. Still, according to fresh ECB prognosis, eurozone inflation this year stays at 0.7 percent; in 2015, it will be 1.1 percent and 1.4 in 2016. That’s way lower than central bank’s desired level. As for eurozone economic growth, ECB predicts 1.4 percent rise this year, 1.7 percent for 2015 and 1.8 for 2016.

The euro area problem being that banks do not want to lend, the central bank decided to take a string of other measures as well – the main one being a targeted loan program for companies. In September and December, banks will be offered cheap loans for up to €400bn; from March 2015 to June 2016, extra loans will be offered, the volume of which will depend on how active the banks are.

At the press conference, Mr Draghi underlined that the central bank will stand ready to use unconventional measures. «Are we finished?» asked Mr Draghi. And continued: «The answer is no. We are not finished here if need be under our mandate.»

Interest rates

New ECB interest rates:

•    Base interest 0.15%

•    Deposits interest –0.10%

•    Overnight credit interest 0.40%