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European Central Bank led by its president Mario Draghi, saviour of the euro two years back, is keeping up strong stimulation of eurozone’s stagnating economy and demonstrating determination to save it from deflation trap. As decided by ECB council yesterday, the base interest is down to the non-existent percentage of 0.05, and deposit interest 0.2 below zero. Also, they are in for a massive purchasing of assets.
The financial crisis which started over five years ago, and the European debt crisis that followed, have so deterred firms and individuals alike that they dare no longer invest. The result is overly slow economic growth in the euro area; at the end of last year, inflation also dropped to lows too deep. Should this persist, eurozone economy may go into deflationary spiral – just like in Japan, for decades.
To avoid deflation, ECB has on several occasions dropped its base interest rate to record lows, and three months ago is dropped deposit interest into negative – a step so far unprecedented for large currencies.
Still, the steps taken so far have not yielded the desired results and the next nonconventional measure now is massive assets buy to the tune of the US FED and the central bank in the UK. According to ECB president Mario Draghi, this isn’t quantitative easing as yet for the bonds are backed with assets. The real QE will be happening when government bonds will be the main purchase. Still, the line is very fine between the asset purchase programme proclaimed yesterday, and the printing of money.
ECB would desire that at long last the money would be flowing from banks to business. By asset purchase, ECB is handing money to commercial banks; but if these park the money back at the ECB as they have been wont to do, they’ll be punished by the 0.2 negative deposit interest rate.
Will ECB’s steps bear fruit? This we do not know. The base interest is now down to almost zero, so it cannot be lowered any further. In case of danger of persistently super-low inflation, the measure that remains is massive purchasing of government bonds i.e. the printing of money. In USA and the UK, this has been a success. The economies of both have rather well recovered from the crisis and are about to wind up the purchases of their own bonds. As predicted by Nordea Bank, the US FED will be raising its base interest next year already.
There has been one positive result from ECB policy so far: the euro has started to fall, spelling good tidings to those exporting into USA and other dollar-lands.