The European Central Bank cut its benchmark interest rates for banks implementing a long-term lending program. That was all the changes the ECB made at the latest meeting. It might seem not a big deal, but it is obvious that Mario Draghi has opted for the way his Japanese counterparts have been sticking too. Such a strategy will allow the European regulator to thoroughly evaluate the euro area’s prospects, the euro’s exchange rate, and steps to be taken.
So, what exactly have Draghi done to encourage the economy of the bloc? Let’s see. The ECB brought down the main refinancing rate a little, to 0.15% from 0.25% previously. That suggests the regulator is not ready yet to rush into a hasty decision leaving room to maneuver. In the meantime, the deposit rate was reduced to minus 0.10% from 0%. It was the first time the ECB made up its mind to take the interest rate negative.
As for the €400 billion targeted lending program for banks, it implies that the ECB intends to improve the European lending market at any cost. However, despite the facelift the monetary policy got, the central bank realizes that deflation remains number one enemy for Europe’s economy. Extremely low inflation, sluggish corporate lending, and a strong euro – all that creates the conditions for the deflation to set in. Thus, the ECB Board of Directors headed by Mario Draghi should go beyond the introduction of countermeasures and policy correction at risk of this economic disaster. They should act drastically and immediately. Basically, the measures introduced on Friday ushered in the new stage, but they might not help to achieve the desirable outcome. But the ECB will be able to stall for time using them for sure.
An important point to remember is that some recognized analysts and financiers find fault for the latest steps the European regulator made. For instance, many conservative-minded experts are of the opinion that the negative deposit rate and soft lending will make money for the business sector even easier to get. Since the low-interest loans become more affordable, that might result in deflation. Europe is treading now the path of Japan lagging behind it by one or two steps. Eventually, Japan is going through the deflation now.
We have to admit that despite the deflation, the Japanese economy is still expanding. Apart from playing with the benchmark rates, Prime Minister of the Land of the Rising Sun Shinzo Abe has used other methods for unification and adaptation of the monetary policy to the economic needs. Some of the measures like the yen devaluation are considered to be seismic. However, “Abenomics” is taken on board now as not only politicians, but also ordinary people have come to realize the reasonableness of such a policy. The plan worked out and the industrial output together with export almost got back to the pre-crisis levels scored before the Fukushima disaster.
But will Mario Draghi dare to go for it? That is an open question. It seems that the ECB chief prefers the Japanese scenario to the American one with its QE, thus alluding to the fact that ECB’s actions are rather predictable so far.
Anyway, the first steps are taken and it is better to watch for the consequences they might cause. As for the non-euro area states, especially the developing ones, they have got sort of a green light. The thing is that Mario Draghi gave a hint that Europe is ready to grant them low-interest loans with easy loan guarantees. That is a great chance for large business, including the Russian one, to seek for the funds needed for development. Besides, the ECB reported separately on the revision of the euro area’s GDP growth outlook for 2014-2016.
The central bank cut its forecast for this year to 1% from 1.2%. Meanwhile, it raised its projection for 2015 to 1.7% from 1.5% and kept in place the one for 2016 (1.8%). That means that the ECB is determined to win the war against the deflation by the end of this year or at least by the beginning of 2015. So, the regulator wants to sacrifice a whole year to get out of the deflation pit. Thus, a negative interest rate is likely to be introduced this year, maybe at the upcoming ECB meeting.