In a surprise move on Sept. 4, the European Central Bank lowered its main lending rate from 0.15 percent to 0.05 percent — a record low — and pushed the overnight deposit rate further into negative territory — from minus 0.1 percent to minus 0.2 percent.
This means that banks will be charged 0.2 percent for depositing funds with the central bank. The move points to the ECB’s sense of crisis that the eurozone economy may suffer prolonged stagnation and fall into deflation.
But there is no guarantee that monetary policy alone will buoy the economy. Reform efforts by individual countries, especially by such major ones as France and Italy, will be necessary if the region is to regain sustained growth.
Total gross domestic product of the eurozone’s 18 countries leveled off in the April-June period from the previous quarter. The inflation rate for consumer goods dropped to 0.3 percent in August, the lowest in four years and 10 months.
ECB President Mario Draghi told a news conference, “Most, if not all, of the data we got in August on GDP and inflation showed that the recovery was losing momentum.”
The ECB forecasts that the eurozone will see just 0.9 percent growth in 2014 but will attain 1.6 percent growth in 2015. The inflation rate is forecast to be 0.6 percent in 2014 and rise to 1.1 percent in 2015 — still below the ECB’s inflation target of just under 2.0 percent.
When the ECB cut its main lending rate in June, it was expected that there would be no more rate cuts. The central bank’s latest decision defied expectations and surprised the financial market. At least temporarily, the ECB achieved what it wanted — a lowering of the value of the euro in the foreign exchange market. But financial institutions in Europe have not fully recovered from the aftereffects of the financial crisis.
It has been pointed out that the banks are not extending a sufficient amount of loans to businesses, especially to medium-sized and small enterprises. The 0.2 percent charge on bank deposits at the ECB is designed to serve as an incentive for banks to lend more to businesses.
The ECB also announced a plan to start purchasing asset-backed securities (ABS) in October in an attempt to lower banks’ risks associated with lending and help them increase loans to businesses. It is hoped that these measures will ease the reluctance of banks in the bloc to lend and help stimulate the eurozone economy.
Still, the size of the ABS purchases by the ECB — expected to be about €100 billion (equivalent to some ¥14 trillion) — is small compared with the Bank of Japan’s purchases of long-term government bonds amounting to ¥50 trillion annually.
Whether the ECB will switch to large-scale quantitative monetary easing as done by the central banks of the United States and Japan will be an issue. Germany has reservations about such easing, fearful that it may damage the trust in sovereign bonds and may put a brake on efforts by such countries as France and Italy to carry out structural reforms.
The rigid labor market and a delay in deregulation needed for encouraging starts of new businesses in these countries are said to be responsible for their economic stagnation. Europe’s economic recovery will be difficult to attain unless these countries become serious about reform efforts.