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European Central Bank announce new economic stimulus

The European Central Bank (ECB) has announced further measures in order to stimulate the Eurozone economy today.

The announcement comes after disinflation in the economy, putting pressure on ECB President, Mario Draghi, to take action. The annual rate of inflation – or rather deflation – currently stands at minus 0.2%, well below the Bank’s target of 2% [1].

The ECB, as expected, announced it has cut its main interest rate to 0% from 0.05%. This is intended to encourage banks to lend more money and boost economic activity to ward off the threat of further deflation [1].

But not everyone is convinced, and the move has already attracted criticism. Prominent European bankers are worried that the ECB would only make things worse with a deposit rate cut. CEO of Austria’s Erste Bank, Andreas Treichl, said: “Savers are risk averse, and capital markets are not very prominent” in his region, meaning “lowering interest rates is not very helpful in stimulating economic growth” [2].

Helge Pedersen, Nordea’s Chief Economist, added that negative or low interest rates could, ironically, hinder credit creation, because banks could increase lending rates to compensate for the money they are losing on deposits [3].

The ECB will also expand its quantitative easing programme from €60bn to €80bn a month. This is also known as the bond-buying programme; using new cash to buy government and private-sector bonds from banks, forcing more money into the system, eventually raising inflation and economic activity [1].

The package of measures, including the decision to cut the benchmark interest rate, was more radical than investors had expected, although they are keen to see if these actions achieve the desired effect.

[1] BBC News. ‘ECB reveals surprise stimulus moves’. bbc.co.uk
[2] Business Insider. ‘Here’s what to expect from the ECB today’. uk.businessinsider.com
[3] Financial Times. ‘Senior European bankers voice concerns over ECB cut’. next.ft.com