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Draghi Throws Down Gauntlet to Fiscal Policymakers

Peter Hemple reports

The European Central Bank (ECB) lowered its benchmark interest rate from 0.05% to 0% on the 10th of March, surprising markets and sending the Euro significantly lower.

The ECB also lowered the deposit rate further into negative territory, charging banks 0.4% rather than 0.3% for leaving money in its vaults, as well as increasing the size of its asset purchase programme from €60bn to €80bn per month and broadening the scope of assets covered. Finally, it offered new longer-term refinancing to banks.

According to Alasdair Cavalla, an economist at Cebr, all of these tools are already in use in some form, but the scope and combination means the ECB has finally exceeded market expectations. He says: "The cut in the deposit rate and the boosting of the quantitative easing programme were widely anticipated in advance. However, the other policy changes were unexpected and can be seen as an implicit admission that the first two are not enough on their own. This follows the slip back into negative inflation in the Eurozone in February.

"Commercial banks have been highly critical of negative interest rates, as they cannot pass on these rates to customers (many of whom would simply store the money in cash) and so make losses on this lending. Certain bankers criticised the negative interest rate policy (NIRP) before the latest ECB move.

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