The ECB's toolbox

ECB president Mario Draghi Will Mario Draghi and the ECB be forced to take further measures?

It's as if the European Central Bank has ploughed through its toolbox and come out with a bunch of policies. But, are any of them significant enough to defeat the spectre of deflation?

The most eye-catching rate cut was taking the deposit rate into negative territory for the first time. It now costs commercial banks -0.1% to deposit money with the ECB.

However, since only about 29bn euros are deposited with the central bank, how much impact could even deterring all of the deposits make to increasing the money circulating in the economy? Cutting the main interest rate to 0.15% will also help, but for banks making loans cutting rates by 0.1% isn't likely to be a major factor.

Second, the ECB is also doing a small bit of quantitative easing - printing cash to buy bonds. Under the Securities Markets Programme, it had bought some Irish, Greek, Italian, Spanish and Portuguese government bonds during the height of the euro crisis to stabilise bond markets. But, it had sterilised them, meaning that the ECB withdrew the equivalent amount of cash from the economy so it wasn't QE and wouldn't offend those who think that it crosses the line into monetising government debt.

The ECB now won't sterilise so it's the equivalent of injecting 165bn euros of cash. It's a quietly radical move for the central bank amidst today's flurry of announcements. It also paves a small step towards fully fledged QE.

The biggest cash injection is again via banks. The ECB will make cheap bank loans available, including a new facility that will target loans to the real economy called Targeted LTRO. The latter will offer up to an estimated 400bn euros of cash to banks that is aimed at getting credit into the real economy. This is similar to the Bank of England's Funding for Lending scheme.

In terms of total cash that's being injected, it's not negligible but also not exactly massive. This is why ECB president Mario Draghi says that there is still more to come. Buying assets - asset-backed securities - is being discussed as is leaving the door open to QE.

The euro has already regained the ground that it lost within hours of the new measures being announced. It's a sign that markets doubt the scale of the ECB's monetary easing is enough to be effective to counteract deflation. If not, then QE may well be next.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 155.

    go west @153
    "bad management
    trade unions

    Good to identify big problems. Good the ambition to 'fix' for general good, such as substantial gain in 'productivity'; not just to play the game, just to get ahead, to damn 'the rest' as if possible not to go down with them. One day 'management & unions' will be able to frame & test 'ideal contracts' in a market of equal citizens, free to move.

  • rate this

    Comment number 154.

    No, because the clear message is : we're heading the same way as Japan. Save and it will be cheaper later.

  • rate this

    Comment number 153.

    6 Hours ago
    The imbalance is actually the price of labour.

    I disagree. A big problem in the UK is bad management, trade unions and mistrust between these 2. If these issues were fixed, productivity would rise substantially and allow HIGHER wages. Also income tax needs to be abolished but that's another story.

  • rate this

    Comment number 152.


    Exponentially inflated house prices break the banks and the whole of the capitalist system and market economy.

    WE have seen this enacted from mid 1990's onwards - almost as a deliberate and wanton act of stupidity/policy by 3 successive Govs. of the BoE keeping interest rates far too low fro a stable economy.

    We must therefore have deflation to regain stability!

  • rate this

    Comment number 151.

    145 John_From_Hendon.

    If I read you correctly you say there is no risk in Deflation.

    Prices at the moment are wrong and have moved to far away from the economic price. The system wants/needs to reset but the authorities are preventing this for the moment.

    Deflation will also be coupled with wage deflation accelerating the race to the bottom.

    The imbalance is actually the price of labour


Comments 5 of 155


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