ECB to keep interest rates ultra-low | Business| Economy and finance news from a German perspective | DW | 21.01.2016
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ECB to keep interest rates ultra-low

European Central Bank President Mario Draghi has said the ECB will keep interest rates extremely low for a long time. He vowed the bank would not "surrender" in its fight against the threat of deflation in the eurozone.

At a news conference in Frankfurt on Thursday at which he discussed ECB's monetary policy stance, Draghi made it clear that no-one should expect a rate rise anytime soon, despite the fact that his counterparts at the Federal Reserve, the US central bank, recently raised rates for the first time in several years - albeit only very modestly.

In contrast, Draghi said, borrowing costs in the eurozone will "remain at present or lower levels for an extended period of time."

The chief monetary authority for the 19 countries that use the euro currency left its key interest rates untouched after its January meeting Thursday, and did not ramp up its existing, already gigantic 1.5 trillion euro ($1.64 trillion) monetary stimulus program.

Fear of deflation

The eurozone's top banker clearly remains concerned the economies of the euro currency area remain vulnerable to a deflationary spiral. Deflation is something central bankers fear like the devil's horns, because once prices start falling, consumers can be tempted to delay purchases, leading to reduced aggregate demand.

Reduced demand means reduced business orders, which tends to be followed by further price-slashing by desperate businesses, and so on in a self-reinforcing spiral. Deflation was the cause of the disastrous Great Depression in the US and in Germany in the 1930s.

Never surrender

"We are not surrendering," Draghi told a news conference, apparently channelling Churchill, in the face of the fact that a wide range of policy measures rolled out by ECB in the past 18 months have failed to steer eurozone inflation back up to the level of just under 2.0 percent which the central bank sees as conducive to healthy economic growth.

Mario Draghi says the ECB could take fresh monetary action in the coming months, prompted by "heightened uncertainty" in the global economy and a weaker-than-expected inflation outlook. The bank is to "review and to reconsider monetary policy" at its March meeting.

That suggests ECB could end up pumping even more newly created money into the financial markets, over and above the roughly 60 billion euros ($60 billion) a month it has already been creating to buy bonds off secondary markets since March 2015.

Ignoring other options

There was no hint in Draghi's remarks, as yet, of new forms of unconventional monetary measures that would pump fresh central-bank money directly into real-world spending and job creation - for example, by "printing" non-repayable money and giving it to a European infrastructure fund, as some prominent voices such as former head of the UK's Financial Services Authority, Lord Adair Turner, have been calling for with increasing urgency.

Turner and others have argued that using the central bank balance sheet to directly fund fiscal spending would work for sure to restore economic activity, whereas "quantitative easing" in the form ECB has been practising has very little effect on the real economy - and has negative side effects like increasing wealth disparities and driving up rents by inflating asset prices, including the prices of stocks, bonds, and real estate.

For now, however, proposals for using the central bank's balance sheet to directly fund economic activity remain taboo in Frankfurt and Brussels.

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