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E.C.B. Acts to Head Off Threat of Recession in Europe E.C.B. Acts to Head Off Threat of Recession in Europe
(about 2 hours later)
FRANKFURT — The European Central Bank took unexpectedly aggressive steps on Thursday to stimulate the eurozone economy, moving to head off a downturn before it gains momentum.FRANKFURT — The European Central Bank took unexpectedly aggressive steps on Thursday to stimulate the eurozone economy, moving to head off a downturn before it gains momentum.
In a bid to increase lending, the bank increased the de facto penalty it imposes on commercial banks that hoard cash. The bank’s Governing Council also said it would begin another round of bond purchases, a form of stimulus known as quantitative easing. The bank will buy 20 billion euros’ worth of bonds, or $22 billion, every month starting in November.In a bid to increase lending, the bank increased the de facto penalty it imposes on commercial banks that hoard cash. The bank’s Governing Council also said it would begin another round of bond purchases, a form of stimulus known as quantitative easing. The bank will buy 20 billion euros’ worth of bonds, or $22 billion, every month starting in November.
Analysts had expected the interest-rate cut, but there was considerable debate whether the bank would go further and restart purchases of government and corporate bonds. It has been only nine months since the bank ended a previous bond-buying program.Analysts had expected the interest-rate cut, but there was considerable debate whether the bank would go further and restart purchases of government and corporate bonds. It has been only nine months since the bank ended a previous bond-buying program.
The bank also exceeded expectations by making an open-ended commitment to keep interest rates low, and sweetening a program that encourages banks to lend money to consumers and businesses.The bank also exceeded expectations by making an open-ended commitment to keep interest rates low, and sweetening a program that encourages banks to lend money to consumers and businesses.
Read more: Central banks around the world are cutting rates to fend off recession.
Carsten Brzeski, chief economist at ING Germany, called the package a “big bang.” But he wondered whether it will be sufficient to avert a slowdown.Carsten Brzeski, chief economist at ING Germany, called the package a “big bang.” But he wondered whether it will be sufficient to avert a slowdown.
“The question remains whether this will be enough to get growth and inflation back on track,” Mr. Brzeski said in a note to investors.“The question remains whether this will be enough to get growth and inflation back on track,” Mr. Brzeski said in a note to investors.
President Trump, who has been pressing the Federal Reserve to lower its benchmark rate, responded to Thursday’s move by needling his own central bank. The European bank, he said is “trying, and succeeding, in depreciating the Euro against the VERY strong dollar, hurting U.S. exports … And the Fed sits, and sits, and sits.”President Trump, who has been pressing the Federal Reserve to lower its benchmark rate, responded to Thursday’s move by needling his own central bank. The European bank, he said is “trying, and succeeding, in depreciating the Euro against the VERY strong dollar, hurting U.S. exports … And the Fed sits, and sits, and sits.”
In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a so-called negative interest rate on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent.In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a so-called negative interest rate on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent.
Mario Draghi, the president of the European Central Bank, has been signaling since June that measures to head off a recession would be necessary, absent an improvement in the economic outlook. Inflation has been stuck well below the official target of 2 percent.Mario Draghi, the president of the European Central Bank, has been signaling since June that measures to head off a recession would be necessary, absent an improvement in the economic outlook. Inflation has been stuck well below the official target of 2 percent.
Mr. Draghi, whose term ends in October, has faced growing criticism that easy-money policies and record low interest rates are fueling asset bubbles and undermining the profitability of commercial banks.Mr. Draghi, whose term ends in October, has faced growing criticism that easy-money policies and record low interest rates are fueling asset bubbles and undermining the profitability of commercial banks.
In response, on Thursday the central bank took steps to ease the pain of negative interest rates, saying that some bank holdings will be exempt from the penalty, a practice known as tiering.In response, on Thursday the central bank took steps to ease the pain of negative interest rates, saying that some bank holdings will be exempt from the penalty, a practice known as tiering.
The bank said it would not begin raising interest rates “until it has seen the inflation outlook robustly converge to a level” below but close to 2 percent, the official target. That open-ended commitment was in contrast to the previous statements when the bank outlined a specific time frame.The bank said it would not begin raising interest rates “until it has seen the inflation outlook robustly converge to a level” below but close to 2 percent, the official target. That open-ended commitment was in contrast to the previous statements when the bank outlined a specific time frame.
Further, the bank said it would ease the terms of a program that allows banks to borrow money on favorable terms, provided they lend it to customers. The loans will be extended to three years from two, and for banks that meet certain benchmarks the interest rate will be negative. In other words, banks won’t pay any interest and won’t have to repay all of the money they borrowed.Further, the bank said it would ease the terms of a program that allows banks to borrow money on favorable terms, provided they lend it to customers. The loans will be extended to three years from two, and for banks that meet certain benchmarks the interest rate will be negative. In other words, banks won’t pay any interest and won’t have to repay all of the money they borrowed.
Central banks around the world are cutting interest rates and trying to encourage borrowing as more and more indicators point to a global slowdown. Last week, the People’s Bank of China cut the amount of money that banks are required to keep in reserve, a step that will increase the amount available for lending and that will lead to lower interest rates. The Federal Reserve is expected to cut interest rates at its next meeting on Sept. 17-18 in Washington.Central banks around the world are cutting interest rates and trying to encourage borrowing as more and more indicators point to a global slowdown. Last week, the People’s Bank of China cut the amount of money that banks are required to keep in reserve, a step that will increase the amount available for lending and that will lead to lower interest rates. The Federal Reserve is expected to cut interest rates at its next meeting on Sept. 17-18 in Washington.
President Trump wants negative interest rates. Here’s how that would work.
The European Central Bank’s action on Thursday amounted to a pre-emptive strike as economic indicators signal slowing growth in the 19 countries of the eurozone. Many analysts predict that Germany is about to slide into recession, dragging down the rest of the bloc. Trade wars and Britain’s chaotic attempt to leave the European Union have made business managers uncertain about the future and reluctant to invest in expanding factories or hiring new workers.The European Central Bank’s action on Thursday amounted to a pre-emptive strike as economic indicators signal slowing growth in the 19 countries of the eurozone. Many analysts predict that Germany is about to slide into recession, dragging down the rest of the bloc. Trade wars and Britain’s chaotic attempt to leave the European Union have made business managers uncertain about the future and reluctant to invest in expanding factories or hiring new workers.
But the measures will also raise questions about what other options the central bank has if the eurozone economy continues to deteriorate.But the measures will also raise questions about what other options the central bank has if the eurozone economy continues to deteriorate.
The benchmark interest rate is already at zero, and the central bank’s balance sheet includes 2.6 trillion euros, or about $2.9 trillion, in government and corporate bonds purchased as part of a so-called quantitative easing program. The purchases are intended to drive down market interest rates by creating demand for government and corporate debt.The benchmark interest rate is already at zero, and the central bank’s balance sheet includes 2.6 trillion euros, or about $2.9 trillion, in government and corporate bonds purchased as part of a so-called quantitative easing program. The purchases are intended to drive down market interest rates by creating demand for government and corporate debt.
In December, the bank announced it would stop adding to its stock of bonds, though it has continued to reinvest the proceeds when bonds mature. Analysts say that the bank has limited scope to restart the quantitative easing program because it already owns such a big chunk of the market.In December, the bank announced it would stop adding to its stock of bonds, though it has continued to reinvest the proceeds when bonds mature. Analysts say that the bank has limited scope to restart the quantitative easing program because it already owns such a big chunk of the market.
As a result, some economists have begun speculating that the central bank could consider more radical action, particularly if it looks like there is a danger of deflation. Some economists have begun urging the central bank to consider printing money and distributing it directly to citizens.As a result, some economists have begun speculating that the central bank could consider more radical action, particularly if it looks like there is a danger of deflation. Some economists have begun urging the central bank to consider printing money and distributing it directly to citizens.
The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be unprecedented and highly contentious. Nothing is likely to happen before Christine Lagarde replaces Mr. Draghi as president of the central bank at the beginning of November.The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be unprecedented and highly contentious. Nothing is likely to happen before Christine Lagarde replaces Mr. Draghi as president of the central bank at the beginning of November.
Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.