Sunday 22 January 2017

ECB is running out of ammunition in its attempts to stimulate inflation and Europe's sluggish economy

The central bank's long-established policy of doing too little, too late continues to disappoint, writes Colm McCarthy

Published 13/03/2016 | 02:30

RINGMASTER: ECB president Mario Draghi announced plans by the European Central Bank to purchase financial assets, designed to push up prices and boost activity through a wealth effect. Photo: Yves Herman/Reuters
RINGMASTER: ECB president Mario Draghi announced plans by the European Central Bank to purchase financial assets, designed to push up prices and boost activity through a wealth effect. Photo: Yves Herman/Reuters

The European Central Bank is running out of ammunition. Last Thursday's announcements of further monetary policy moves are an attempt to boost the sluggish economy and the inflation rate, which remains close to zero. There are widespread doubts that the latest measures will have the desired impact.

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The ECB expanded its plans to purchase financial assets, designed to push up prices and boost activity through a wealth effect. Commercial banks hold large balances with the ECB and the negative interest-rate penalty has also been widened. The idea is to incentivise them to lend into the economy instead.

Finally in a new move, the ECB will pay banks to borrow on condition that they increase real economy credit. These measures are minor variations on the theme of 'what do you do when official interest rates are already zero'.

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