ECB Easy Money Lost as Real Rates Rise: Chart of the Day

Mario Draghi’s newest stimulus package aims to do something previous measures haven’t achieved -- push ultra-low interest rates through to the economy.

The CHART OF THE DAY shows the real cost of borrowing for companies, or bank interest rates adjusted for inflation, rose in most euro-area nations in the 12 months through April, the most recent period for which data is available. While the European Central Bank president cut the benchmark rate by half a percentage point over that period, the effect was largely wiped out by stagnant or falling prices and lenders’ reluctance to pass on the reductions.

Draghi announced policies on June 5 including a negative deposit rate and conditional loans to banks to bolster credit and steer the currency bloc away from deflation. Consumer prices rose 0.5 percent last month, down from 1.2 percent in April 2013 and below the ECB’s goal of just under 2 percent.

“Real rates need to ease further, or the ECB might be forced to do more,” said Frederik Ducrozet, an economist at Credit Agricole CIB in Paris. “While a short period of low inflation might be supportive of households’ purchasing power, higher real rates for longer would impair the recovery.”

Higher financing costs hurt companies’ willingness to invest, curbing output and employment and in turn weighing on consumer prices. Spanish companies paid an average of 1.2 percentage points more in real terms to borrow money in April compared with a year earlier as the cost of bank loans held steady and inflation slowed. A drop in nominal rates in Italy was overwhelmed by a slump in inflation.

Estonia, the Netherlands and Slovakia were the worst hit. Only Portugal, with the biggest decrease in nominal bank rates, and Germany recorded a decline in real borrowing costs. Data wasn’t available for Greece, Malta and Luxembourg. Latvia wasn’t included as it wasn’t part of the euro area in 2013.

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