Mario Draghi says the European Central Bank isn’t through with its efforts to stimulate Europe’s economy and fight off the threat of deflation. That message—that more is to come on top of the extensive measures announced today—is what seems to have impressed financial markets. Following today’s press conference by ECB President Draghi, European stocks extended their gains, reaching a six-year high, and bond prices in Spain and Italy surged, lowering those nations’ borrowing costs.
“Draghi’s gone all-in today,” Owen Callan, an analyst at Danske Bank in Dublin, told Bloomberg News. “Don’t think of this as a bazooka. This is more like a fleet of killer drones to target deflation from all angles.”
As I wrote yesterday, Draghi has a huge job and limited tools to accomplish it. But at least he’s trying. Impressively, he managed to get the entire Governing Council to support his plan—including the Germans, who are wary that supereasy monetary policy will create asset bubbles and raise inflation.
The most eye-catching part of the ECB’s action is to cut the deposit rate to a negative 0.1 percent, meaning that banks will be charged for parking money at the European Central Bank instead of getting paid interest on their funds, as is usual. That’s less impressive than it might seem, though, because banks have already slashed their deposits at the ECB, so not a lot of money is involved. If banks weren’t lending out their funds to consumers and businesses when the deposit rate was zero, it’s unlikely they will lend aggressively because the rate is a tenth of a percent lower. The cut in the ECB’s main lending rate, known as the refinancing rate, to 0.15 percent from 0.25 percent probably won’t make a huge difference either.
More significant is a new half-trillion-dollar ECB program in which long-term loans to banks will be tied to their own loans to customers, which is similar to the Bank of England’s Funding for Lending, and an asset-purchase plan that’s being developed but not yet deployed, which would be akin to the Federal Reserve’s quantitative easing program. In addition, the ECB will formally stop “sterilizing” past bond purchases, which has the effect of injecting more reserves into the banking system.
“We think it’s a significant package,” Draghi told reporters in Frankfurt. “Are we finished? The answer is no.”
As Bloomberg’s Jeff Black and Stefan Riecher write today, “this is the most dramatic announcement by the ECB since Draghi said the bank would ‘do whatever it takes’ to save the euro in the summer of 2012. While that succeeded in keeping the bloc together, the ECB is still trying to fix its battered economy as banks in southern Europe unwind bad loans and shy away from fresh lending to businesses that could spur growth.”