Gavyn Davies: Draghi has done enough to silence the doubters

The European Central Bank’s decision to reduce the interest rate on deposits at the central bank to minus 0.10 per cent went as far as even the most ardent doves could reasonably have expected. Rates can probably fall no further. As Mario Draghi, the ECB president, said: “For all practical purposes, we have reached the lower bound.”

For that reason, the more technical elements of the package announced on Thursday in Frankfurt are in some ways the most significant. There was a €400bn injection of liquidity, in what the ECB called a “targeted longer-term refinancing operation” – a near copy of the Bank of England’s Funding for Lending Scheme. There was a form of quantitative easing, in which the central bank will buy securities backed by private sector loans. And there was the cessation of a “sterilisation” exercise, which had previously damped the monetary effect of the ECB’s purchases of government bonds.

Unlike the interest rate, which is now as low as it can go, all of these measures could be intensified if the eurozone recovery continues to disappoint. “We are not finished here,” Mr Draghi said, hinting at the possibility of further action “if need be under our mandate”. This statement was unanimous, and therefore presumablysupported by the Bundesbank, the arch conservative among the eurozone’s national central banks. It reduces the risk that the ECB will become trapped in a deflationary cycle, as Japan did in the 1990s.

Is this a “big bazooka”? It clearly falls some way short of a broad asset purchase programme of the kind pursued by the Federal Reserve and the Bank of Japan. None of the measures introduced on Thursday will produce a transformation in monetary conditions. After all, Denmark cut the interest rate on deposits at the central bank below zero a couple of years ago, with only moderate effects. True, the ECB carries more sway than the Danish central bank. Nonetheless, its move on interest rates should be seen in the same way as any other small reduction. One should not be too excited by the fact that it happens to have crossed the zero threshold.

A negative interest rate is, in effect, a levy on banks: instead of receiving interest on their deposits at the ECB, they will watch them shrink. But the TLTRO and liquidity injections cut the other way, perpetuating the ECB’s recent efforts to provide extremely easy conditions in the money markets. So far as I can see, the banks should gain more from easy money than they lose through negative interest rates. That may explain why bank shares rose after Mr Draghi’s statement.

The decision no longer to sterilise the central bank’s earlier purchases of government debt is a signal of intent, even if its direct effect is not very large. For the first time, the ECB is financing these purchases by creating money. Many had assumed that Mr Draghi would never embark on a QE programme big enough to make a substantial difference to inflation or the exchange rate, for fear of opposition from the German central bank. But having acquiesced in such a programme – albeit on a small scale – the Bundesbank would now find it harder to object on principle. The course pioneered by Haruhiko Kuroda at the Bank of Japan can no longer be assumed to be entirely out of the ECB president’s reach.

It is impossible to know whether the promise to start buying asset-backed securities will develop into a major initiative. At present, such securities are rare; unless the market starts creating them, there will be little for the ECB to buy. Mr Draghi is clearly minded to offer inducements – although technical obstacles have yet to be surmounted. Still, when the central bank makes itself the buyer of last resort, prospective sellers will take note.



The TLTRO is designed to encourage banks to increase their lending to the private sector, in sectors other than housing. The BoE has had some success with this approach. But in Europe, as in Britain, a lack of demand for loans may limit its effectiveness.

Thursday was an important day. The ECB’s balance sheet has been shrinking recently, as previous LTROs were paid off; now it will probably grow once again. More importantly, the central bank signalled that it was ready to back words with action.

Inflation in the euro area has fallen to about 0.5 per cent – and much lower in some countries. To many outside observers, it already looks extraordinary that the ECB has drifted so far from its inflation target of just below 2 per cent without adopting some form of QE. High unemployment in the eurozone is an indication that inflation is unlikely to return quickly.

Mr Draghi has acknowledged on many occasions that a prolonged period of low inflation is now inevitable. But he promised that any further worsening in the outlook would produce action from the governing council. His promises were beginning to look empty. Yesterday, he took action. For the immediate future, it should be enough.


Gavyn Davies


Fonte: FT