No quantitative easing now, says ECB’s Draghi
September 4, 2014, 5:59 pm

The European Central Bank appears to have taken its last measures to kickstart the stalled eurozone economy. The next step could likely be a government bond-buying stimulus scheme [Xinhua]

The cutting of three main interest rates – including a benchmark interest rate which has been slashed from 0.25 per cent earlier in the year to 0.05 per cent – has jolted
markets.

The euro currency dropped from 1.315 to 1.293 against the dollar by the end of trading in European markets.

Banks hoping for a Quantitive Easing (QE) decision from the ECB were disappointed, however.

Mario Draghi, the ECB president, said that the governing council’s members could not reach consensus on whether the ECB should buy government bonds, a QE program which has been used for the past five years in the US.

In a bid to increase liquidity (monetary supply) and promote lending – in particular when interest rates near rock-bottom levels but fail to revitalize the economy – Central Banks can resort to quantitative easing by flooding financial institutions with capital.

In 2009, the US Federal Reserve launched an $85-billion bond-buyback program to generate stimulus in the economy following the sub-prime mortgage crisis which led the world into recession.

Draghi says the ECB is still considering QE, but in the meantime it will begin a private sector financial asset buying scheme to purchase debt products from banks.

“So our proposal strikes the mid-road…. a broad asset purchase program was discussed, and some governors made clear that they would like to do more,” he told reporters.

The ECB believes that its latest moves will spur borrowing from banks by making credit cheaper.

Banks then will in turn increase lending to consumers, thereby boosting investment and increasing GDP growth in the struggling 18-nation eurozone.

In another move to persuade banks to lend more, the ECB also cut its deposit rate — the fee banks pay to keep their money overnight at the central bank — to minus 0.2 per cent from minus 0.1 per cent.

This means banks will now be charged more for not lending.

Source: Agencies