The ECB acts: The waiting is over

AFTER delay and agonising, the European Central Bank has finally taken action to tackle worryingly low inflation in the euro zone. Just two days after official figures showed that inflation had fallen back to a mere 0.5% in May, the ECB’s governing council took three new steps to try to get it heading back towards its target of almost 2%.First, the ECB has made history by becoming the first big central bank to go negative. Not only did it bring down its main lending rate from an already low 0.25% to 0.15%, but also it lowered its deposit rate, paid to banks for funds left with the central bank, from zero to minus 0.1%, in effect charging them for such deposits. The policy has two main aims. One is to curb upward pressure on the euro, which has been contributing to the drop in inflation. The other is to try to get banks flush with funds in the northern core of the euro zone to lend again to those in the southern periphery, which would promote a stronger recovery. The risk is that banks may seek to offset the charges by raising their lending rates.Second, the ECB is seeking to help credit-starved businesses in southern Europe by providing cheap long-term funding to banks that support these firms. It will conduct two four-year lending operations to banks, in September and December of this year, and will provide further funding between March 2015 and June 2016; all of these …

Link to article: www.economist.com/blogs/freeexchange/2014/06/ecb-acts?fsrc=rss

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