In a move that had been widely expected against a backdrop of anaemic growth in the Eurozone and low inflation which was stoking talk of harmful deflation in certain quarters, the ECB has acted to reduce its interest rate and undertake a number of other measures designed to stimulate the economy of the bloc.
The ECB shaved 0.1% of its interest rate, dropping it to just 0.15% - this is the rate at which European banks can borrow from the ECB at. A low interest rate is designed to encourage Eurozone banks to cut their rates for loans to businesses, hopefully encouraging business expansion and creating new jobs in the bloc. Of course, businesses will only take on new loans when they are confident that expansion is justified by demand for their goods and services – only when businesses expand will new jobs be created.
In a less expected move, the bank decided to levy a charge of 0.1% on commercial banks leaving money on deposit at ECB. The intention of this move is to encourage banks to boost liquidity within the Eurozone – ECB has become the first major central bank to adopt such an approach. The bank also announced that it would provide “cheap” longer-term loans to banks (until 2018) which would cap at a maximum of 7% of the value of funds lent by the borrowing banks to businesses.
Speaking after the ECB meeting, Mario Draghi noted: “Are we finished? The answer is no. We aren't finished here. If need be, within our mandate, we aren't finished here. Now we are in a completely different world” – it could be that he is not finished! He stressed that the economic well-being of the Eurozone economy was not just in the hands of the ECB, but commercial banks and governments needed to play an active role in increased lending and reforms of the financial sector.
"In order to strengthen the economic recovery, banks and policy-makers in the euro area must step up their efforts. Banks should take full advantage of this exercise to improve their capital and solvency position, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery. At the same time, policymakers in the euro area should push ahead in the areas of fiscal policies and structural reforms," he added.
The news of the ECB decision sent the Euro to a four month low against the Dollar, but it quickly regained ground and closed higher. The stimulus measures were well received by European stock markets.
It is also doing preliminary work that could lead to buying bundles of loans that are made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets.
Mr Draghi said the ECB's policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. The ECB stopped short of instituting a large asset-buying programme like the quantitative easing (QE) undertaken by the US Federal Reserve. However. Mr Draghi insisted that more would be done, if necessary.
Mr Draghi said that the whole package of measures was aimed at increasing lending to the "real economy". nEven though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcement. The benchmark German Dax 30 index jumped above the 10,000 level for the first time. The Cac 40 in Paris was up 0.8% shortly after the ECB's comments. Meanwhile, the euro fell to $1.3558, its lowest level in four months.