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.
Video Credit By Reuters on 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.
No comments:
Post a Comment