Monday 19 February 2018

ECB may now pay banks to borrow in bid to boost growth

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Donal O'Donovan

Donal O'Donovan

The European Central Bank (ECB) may end up paying banks to borrow from it as long as they can prove they lend on the cash to households and companies, Mario Draghi said yesterday as he cranked up measures aimed at boosting growth.

The ECB president said that under the new targeted longer-term refinancing operations, four-year loans would be offered at the ECB's main refinancing rate - which he had just cut to zero - with a discount for more active lenders.

"Banks will pay the (refi) rate at the time of bidding - so right now, zero - and they may even get a reduction of that rate which increases with the amount of loans they grant," Draghi told a news conference after the bank's policy meeting.

"The maximum reduction will bring the rate on the TLTRO2 to the level of the deposit facility rate at the time of bidding."

The euro zone's central bank cut its deposit rate to -0.4pc yesterday, suggesting it will effectively pay banks to borrow from it in order to help boost growth and inflation.

"The amount that banks can borrow is linked to the amount of loans they have on their balance sheet," Mr Draghi added.

"So a bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities."

The cost-free loans are a sign of policy makers increasingly desperate efforts to lift growth and inflation, which have stalled across the Euro area.

Ironically, the ECB was pulling out the stops to drive growth as it was confirmed here that the Irish economy grew at a thumping 7.8pc last year, the fastest pace since 2000.

Loose money should be a boost to Irish exporters, if it weakens the euro, but the single currency rose to a three-week high against the dollar yesterday, lifted off a six-week low after Mr Draghi said he did not anticipate further interest rate cuts are on the way.

The euro also posted gains against sterling.

While Mr Draghi said he does not expect further easing, he did say interest rates will remain low for a long time.

"But when the dust settles, I think the euro is still going to go lower, based on the fact that the ECB exceeded market expectations with its suite of policy tools, and also market positioning heading into today's meeting was far less bearish for the euro than we saw in previous meetings," said Omer Esiner, an analyst at Commonwealth Foreign Exchange in Washington.

The ECB plans to add corporate bonds to the €80bn a month it will spend buying financial assets on the markets - up from €60bn.

Bond buying over the last year has already driven the cost of borrowing for the State here, and others in Europe, to record lows. If the same effect is felt in the corporate bond markets big companies including higher rated Irish issuers like Ryanair and CRH will now see their borrowing costs tumble.

Borrowers in Ireland, including those with tracker loans will see their debt cost fall automatically after the lastest ECB move.

Experience over the past year however suggests that ECB rate cuts may not being felt by most home buyers or small and medium enterprise (SMEs), whose borrowing costs remain a multiple of the official level.

Across Europe, the ECB still has a lot to prove. Efforts to lift the economy so far have been to little avail. (Additional repoting Reuters)

Irish Independent

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