Mario Draghi gets out his big bazooka
The European Central Bank fires another salvo
Quantitative easing gets a further boost in the euro area, and interest rates are cut again
A YEAR ago the European Central Bank (ECB) started its big programme of quantitative easing, or QE, buying €60 billion ($65 billion) of assets a month, in an attempt to stimulate the euro area’s sagging economy and prevent deflation setting in. In December it extended the programme by six months, until March 2017. Now it has raised the tempo, to €80 billion a month, starting in April.
This was the most eye-catching of the ECB’s latest set of measures to ease monetary policy, announced on March 10th. In December, it had also reduced its deposit rate, on most funds parked by banks at the ECB, further into negative territory, from -0.2% to -0.3%. Now it has lowered the rate again, to -0.4%, while also cutting its main lending rate from an already nugatory 0.05% to zero. Up till now, the asset purchases have been mainly government bonds, together with covered bonds issued by banks (typically backed by mortgages) and a small amount of asset-backed securities. Now corporate bonds are on the menu, too. The ECB will also conduct four new funding-for-lending operations between June and March 2017, each with a maturity of four years, aimed at boosting credit to the private sector by providing funding on extremely favourable terms.
The ECB is having to do more than it initially envisaged in early 2015 and then in December because growth has been flagging and prices are falling once again. When QE was launched, the recovery that had started in the spring of 2013 was picking up momentum, reaching 0.6% (an annualised rate of 2.3%) in the first quarter of 2015. But that proved to be a (not very) high point and quarterly growth has since ebbed to 0.3% in late 2015 (an annualised rate of 1.3%).
The ECB is supposed to keep inflation close to 2%, but deflation has returned. The headline inflation rate sank from 0.3% in January to -0.2% in February. Although the renewed fall in energy prices was partially responsible, “core” inflation, which excludes volatile items such as energy, fell from 1.0% in January to 0.7% last month.
Underpinning the fresh stimulus was a set of new forecasts, which painted a gloomier outlook, especially for inflation, than the previous ones in December. ECB staff now expect the euro area to grow by 1.4% in 2016, lower than the 1.7% projected in December. Mario Draghi, the bank’s president, said that risks to the growth outlook were “tilted to the downside” because of heightened uncertainties about the world economy. The downgrade to the inflation outlook was substantial. Following a year of zero inflation, consumer prices will rise in 2016 by just 0.1% whereas in December they were expected to increase by 1.0%. In 2017 inflation is forecast at 1.3% compared with 1.6% at the end of last year.
Mr Draghi has clearly delivered considerably more than in December, in particular through increasing the scale of monthly asset purchases. The four new funding-for-lending operations may also help, although banks have hardly fallen over themselves to take advantage of an existing programme launched in 2014. But the cut in the deposit rate was overshadowed by Mr Draghi saying that “we don’t anticipate that it will be necessary to reduce rates further.” In fact this is not the first time that he has made such a statement, declaring in September 2014 for example (when the deposit rate was cut to -0.2%) that “now we are at the lower bound”, only for the ECB to lower the deposit rate still further in December 2015 and today. But as worries about the harm done by negative rates to bank profitability have mounted, it seems that Mr Draghi has now drawn a new line.
The ECB’s new measures signal resolve, and that Mr Draghi is still intent on, as he promised back in 2012, doing “whatever it takes” to save the euro. But increasingly, markets are doubting the efficacy of overstretched monetary policy. Foreign-exchange traders responded to the measures by first marking the euro down against the dollar and then up as the impact of Mr Draghi’s words on not lowering interest rates further sank in. Since one of the main ways in which QE has helped the euro-zone economy is through a weak currency, that does not bode well for the success of the ECB’s latest venture.