News Column

What they're doing: Bank fighting on four fronts, with QE on the horizon

June 6, 2014

The European Central Bank (ECB) moved on four fronts to boost access to cheap credit and hinted at a fifth.

1 The deposit rate for commercial banks was cut to -0.1% from zero. It means banks will now have to pay for the privilege of parking their money with the ECB. ECB officials expect banks to withdraw funds and lend them to households and businesses.

2 The central bank cut its main interest rate to a new record low of 0.15% from 0.25%. It is possible lenders will pass on the cut to borrowers, although the benefit to the average household is quite small and businesses remain reluctant to borrow after GDP growth almost ground to a halt in the first quarter.

3 A euros 400bn package of cheap funding for banks known as longer-term refinancing operations (LTROs). The cheap credit will be handed to banks on the condition it is used to lend money to companies outside the financial sector, and not for mortgages. It is a dramatically scaled down and less sophisticated version of the Bank of England's funding for lending scheme which many analysts credit with boosting the housing market last year.

4 The ECB also said it would stop sterilising the bonds it bought during the height of the eurozone crisis, which means it will stop taking money out of the system elsewhere to offset those purchases. Previously, to protect against charges that it is simply printing money to fund budget deficits, the ECB bought sovereign bonds in the secondary market and offset these purchases by taking an equal amount of money out of circulation.

5 Draghi said the ECB was preparing to pump cheap funds directly into the economy via a programme of quantitative easing (QE). The US Federal Reserve, the Bank of Japan and the Bank of England have already added trillions of dollars to the world's supply of money through their own QE programmes. Southern European members of the eurozone, which have high rates of unemployment and almost negative inflation, are especially keen for QE to start.

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Source: Guardian (UK)

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