ECB injects fresh stimulus in bid to inspire sluggish eurozone | News | DW | 12.09.2019
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BUSINESS

ECB injects fresh stimulus in bid to inspire sluggish eurozone

Outgoing ECB President Mario Draghi has achieved his goal of further cuts to interest rates and the renewal of bond buying for the euro area. But some policymakers are skeptical that the move was necessary.

European stocks rose and the euro dipped after the European Central Bank (ECB) announced it will cut deposit rates even further below zero and renew its bond buying program in an attempt to stimulate a sluggish euro-area economy and spur inflation growth.

The ECB's 25-member Governing Council voted to cut deposit interest rates by 10 basis points to -0.5%, a record low, according to an ECB statement on Thursday.

After the announcement, eurozone stocks reached their highest levels in seven weeks, with both Frankfurt's DAX 30 index and France's CAC 40 seeing gains.

The ECB is one of five central banks currently operating with negative deposit rates, along with central banks in Switzerland, Denmark, Sweden, and Japan.

The council also agreed to renew its bond buying program, signaling it will commence €20 billion a month in asset purchases, starting November 1, 2019, and continuing indefinitely.

In addition, the ECB will introduce tiering, a mechanism designed to partially exempt banks from paying interest on excess cash deposited with the central bank. This is welcome news for banks, who say negative rates have hurt their bottom line. 

Watch video 01:39

Report warns of Brexit-led recession

Recession on the horizon?

The eurozone inflation rate has lingered around 1.2%, far below the goal of "below but near 2%" that the ECB has set for itself in order to maintain price stability.

Economic growth has stalled as Europe copes with the fallout of a volatile global market rocked by Brexit and the trade war between China and the United States.

European exports and manufacturing production have slowed in recent months and export-reliant Germany, the eurozone's largest economy, is teetering on the brink of recession, a development that would reverberate around the region.   

Draghi paved the way for the decision in July, saying in a press conference that conditions in the eurozone were getting "worse and worse" and that the ECB was prepared to act should the situation not improve.

While playing down the prospects of a recession in the eurozone as a "small probability," Draghi noted the need for Germany to take "timely and effective action" to avoid sparking a larger slide in the eurozone.    

Read more: Is Germany heading towards recession?

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Budget forecast for Germany

Growing resistance at home, hostility from abroad

But dissident policymakers grew more vocal in their resistance to stimulus in the weeks leading up to the decision. For instance, ECB Governing Council members, including Jens Weidmann and Klaas Knot, central bank governors for Germany and the Netherlands respectively, came out against the move.

Despite sluggish growth and low inflation, unemployment in the eurozone is still low and has bolstered consumer spending. Euro-area GDP grew 0.2% in the second quarter.

US President Donald Trump, who has been criticizing both ECB and US Federal Reserve policies for months, took to Twitter to weigh in on Thursday's announcement, writing, "They are trying and succeeding in depreciating the euro against the very strong dollar, hurting US exports."

ECB President Draghi was quick to respond, asserting, "We have a mandate: We pursue price stability, we don't target exchange rates."

Call for help

Despite growing resistance, markets expected the ECB to move ahead with bond buying in the lead up to the decision. Draghi has earned a reputation for getting his way in his nearly eight years as ECB president. With his departure imminent, Thursday's decision will have a key role in shaping his legacy.

Read more: ECB President Mario Draghi's swansong stimulus faces stiff opposition

The policy meeting was his second to last as president before his replacement, former International Monetary Fund chief Christine Lagarde, takes over on October 31. Thus far, Lagarde has echoed her predecessor's view on negative interest rates and has called for greater action from national governments.

Germany, for its part, has resisted stimulus measures, despite access to a large budget surplus.

Watch video 01:30

Lagarde at EU parliament hearing for ECB presidency

  

js,kp/stb (AFP, Reuters)

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