Sunday 25 February 2018

ECB says measures will push inflation up, money-printing still possible

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi

A raft of policy measures introduced last month will help lift inflation and support bank lending but the European Central Bank stands ready to create money in future if required, President Mario Draghi said today.

The ECB left interest rates steady a month after cutting them to record lows and pushing the deposit rate into negative territory for the first time - effectively charging banks for holding their money overnight to prompt them to lend to businesses.

The measures unveiled in June also included extending the duration of unlimited cheap liquidity for banks until the end of 2016, and offering them a four-year loan plan.

Draghi said last month's measures had further loosened the euro zone's monetary policy stance.

"The monetary operations to take place over the coming months will add to this accommodation and will support bank lending," he told a news conference after the ECB left its key rate at just 0.15 percent.

"As our measures work their way through to the economy, they will contribute to a return of inflation rates to levels closer to 2 percent."

The euro zone inflation rate held at 0.5 percent last month, well below the ECB's target of close to but below two percent and in what Draghi has called the "danger zone".

If people and firms began deferring spending plans on the basis that they expected prices to fall, an economic downward spiral of the sort suffered by Japan could take hold. The ECB says its sees no sign of that.

Draghi said the ECB's Governing Council was united in its willingness to launch into quantitative easing - essentially creating money to buy government or private debt from banks to keep borrowing costs low and boost spending - if inflation headed lower still.

He added that risks to economic recovery remained primarily negative.

"The Governing Council is unanimous in its commitment to also using unconventional instruments within its mandate, should it become necessary to further address risks of too prolonged a period of low inflation," Draghi said.

Few analysts expect that to be remotely possible until late this year. The central bank has said last month's moves could take up to a year to take full effect.

"After the rate cut in June, they'll wait ... probably until the end of the year, to assess the effect that will have," Berenberg bank economist Christian Schulz said.


Banks will be charged a 10 basis point premium over the ECB's main funding operations for the TLTROs, or targeted long-term refinancing operations.

By offering banks the four-year loans at low rates, the ECB hopes to entice banks to lend more freely, particularly to small- and medium-sized companies in the euro zone periphery.

Banks used large parts of the last round of cheap ECB funding in 2011/2012 to buy higher-yielding government bonds and the question is how the ECB will avoid similar behaviour this time and steer the money towards company loans instead.

The ECB will publish details of its new long-term loan programme for banks later on Thursday.

Big questions remain, one being why banks would be likely to lend more before stress tests later this year at which they must demonstrate they have cleaned up their balance sheets.

"Banks should take full advantage of this exercise to improve their capital and solvency position, thereby supporting the scope for credit expansion during the next stages of the recovery," Draghi said.

The ECB chief said the central bank would move to a schedule of six-weekly rather than monthly meetings from next year, mirroring the frequency of the U.S. Federal Reserve's policy gatherings.

It will also start publishing regular minutes of its meetings, as the Fed and Bank of England do.

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