European Central Bank to Start Asset Purchases After Further Rate Cut
Mario Draghi, the European Central Bank president, announced that the bank would cut interest rates to an all-time low.
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Publish Date September 4, 2014.
Image CreditKai Pfaffenbach/Reuters
FRANKFURT
— The European Central Bank surprised many analysts on Thursday by
cutting interest rates from their already record-low levels and said it
would soon begin buying packages of bank loans, in its continuing
efforts to stimulate lending in the faltering eurozone economy.
The
moves are unprecedented, but appear to fall short of the broad,
large-scale purchases of government bonds and other financial assets
advocated by many economists — nothing yet close to the big program of
purchases that the United States Federal Reserve has used in recent
years to pump money into the economy.
And so, while financial markets initially rallied on the news, it remains to be seen whether the euphoria lasts.
The central bank’s president, Mario Draghi, said that the bank’s Governing Council was ready to take further measures if needed.
“The
governing council is unanimous in its commitment to using additional
unconventional instruments,” Mr. Draghi said at a news conference. And
yet, he indicated the council was still divided on whether to pursue a
Fed-style program of so-called quantitative easing.
Mr.
Draghi indicated interest rates were now as low as the central bank
would go, and he acknowledged that Thursday’s rate moves were merely
technical adjustments unlikely to do much to stimulate lending in the
eurozone.
The
bigger news was the announcement of a program to buy packages of bank
loans and other asset-backed securities. But there were few details —
making the potential impact hard to gauge. Mr. Draghi did not say how
much the central bank would spend on the program because there was not
yet enough information on the size of the market.
Mr.
Draghi said the central bank would buy existing and new assets
including residential and corporate loans. He said the purchases would
be “significant,” if still short of a level considered Fed-style
quantitative easing.
The Federal Reserve after the financial crisis resorted to buying assets
from banks and investors to get more money flowing into the American
economy and many economists say it has contributed to stronger growth
and lower unemployment.
But
because the eurozone program will be less extensive and so late in
coming, analysts question whether it will do much good for a region in
danger of tumbling back into recession.
T
he Federal Reserve bought both asset-backed securities and government
bonds in its quantitative easing program, but many people in
countries like Germany consider purchases of government bonds to be a
violation of the E.C.B.'s charter.
Asset-backed
securities have acquired a bad reputation in recent years because
bundles of subprime loans, often repackaged in complex ways that
obscured the true risk, played a large role in causing the financial
crisis that began in 2008. Mr. Draghi has said the central bank will
only buy asset-backed securities that are simple and easy to understand,
and therefore less risky.
The
central bank cut its main interest rate to 0.05 percent from 0.15
percent, a record. It also increased the fee it imposes on banks to
store money at the E.C.B., to 0.2 percent from 0.1 percent. The
so-called negative deposit rate, first imposed in June, has already
pushed some market interest rates below zero.
Stocks
in Europe rose and the euro fell sharply against the dollar after the
E.C.B. action. Some analysts said the central bank was deliberately
weakening the euro, which would make eurozone exports cheaper abroad and
also push up inflation within Europe. A weaker currency means that
citizens of eurozone countries would pay more for imported goods like
fuel.
Many
economists have said the central bank should have begun quantitative
easing, similar to the Fed program, months ago to avert the threat of
deflation, a downward spiral of prices that can lead to high
unemployment. Annual inflation in the eurozone was 0.3 percent in
August, according to an official estimate, well below the central bank’s
target of about 2 percent.
“Q.E.
was discussed,” Mr. Draghi said. “A broad asset purchase program was
discussed.” He said some members of the governing council favored
starting such purchases, but others did not.
A
few analysts had predicted the rate cut, but most had expected the
central bank to refrain from new stimulus measures until it had a chance
to gauge the success of a program designed to restart the flow of
credit to troubled countries like Italy and Spain.
The
program, which begins this month, allows commercial banks in the
eurozone to draw cheap four-year loans from the central bank if they
issue credit to businesses and households.
The
rate cut is probably too small to have much of an effect on market
interest rates and may be designed instead to make the lending program
more attractive to banks. The interest on the four-year loans from the
central bank is the same as the benchmark rate plus 0.1 of a percentage
point. With the rate cut Thursday, the interest on the loans will fall
to 0.15 percent.
The
central bank last cut the main interest rate in June, to 0.15 percent
from 0.25 percent. It also began imposing a 0.1 percent penalty on money
that commercial banks park at the central bank. That so-called negative
interest rate — now pushed to 0.2 percent — has helped push down market
interest rates on some government bonds and money markets below zero,
but the cheap money has not yet found its way to struggling businesses
in countries like Italy and Portugal.
The
E.C.B. will monitor whether banks have used the money to increase loans
to businesses or households. If the central bank finds that they have
not, banks will be required to repay the money early.
Analysts
said it was unlikely that the central bank would begin quantitative
easing until it knew how many banks had taken advantage of the lending
program. It would be difficult to calibrate asset purchases without
knowing how much money the existing measures were injecting into credit
markets.
Quantitative easing would be more difficult and risky in Europe, because of the region’s fragmented bond market.
The
market for asset-backed securities in the eurozone is too small to have
a big effect on the economy, and many people — especially in Germany —
consider purchases of government bonds a violation of the central bank’s
charter against financing governments. Almost certainly, some
conservatives in Germany would file lawsuits at the country’s supreme
court to try to block the action.
Some
bankers have said they doubt that the lending program will improve the
flow of credit. One of the reasons that lending in the eurozone has
remained subdued is that many borrowers are considered simply too risky.
“The
question is whether banks are willing to lend at all to those people,”
said Richard Barwell a senior economist at Royal Bank of Scotland.
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