With seven weeks to go before the end of his eight-year term, ECB president Mario Draghi is again determined to do “whatever it takes” — just as in 2012, when his pivot to radical monetary easing saved the currency union from collapse.
Although Mr Draghi insisted that “this package is adequate to re-anchor inflation expectations”, he argued that the bloc’s member states should be playing a bigger role.
“If fiscal policy had been in place, or would be put in place, the side-effects of our monetary policy would be much less, the action of our decisions today would be much faster and therefore the need to keep in place some of these measures would be much less,” he said.
The ECB relaunched its €2.6tn quantitative easing programme of bond-buying which had been on hold since the end of 2018, saying it would buy €20bn a month from November.
Taking into account its recycling of the proceeds of its existing bondholdings that mature, it could end up purchasing around €35bn of bonds a month, according to some estimates.
It did not set an end date for the purchases, saying they would continue until inflation expectations came “sufficiently close to, but below, 2 per cent”, at which point interest rates could also start rising again.
Frederik Ducrozet, strategist at Pictet Wealth Management, said this more dovish stance was an open invitation for eurozone governments to take advantage of low interest rates to issue more debt. “It is fiscal QE, or as close to it as you will get.”
QE is widely seen as having helped to revive the eurozone economy, but it has become increasingly divisive. In countries like Germany the ECB is often accused of penalising prudent savers and fuelling potential asset bubbles in housing, stock markets and bonds.
The heads of the German, Dutch, Austrian and Estonian central banks had all publicly stated their opposition to restarting QE.
“The different factions in the ECB are at each others’ throats and all because the Germans don’t want to do a fiscal stimulus,” said Melvyn Krauss, a senior fellow at Stanford University’s Hoover Institution.
Mr Draghi admitted there was “diversity of views” on restarting the bond-buying programme, but he said there was still “a clear majority” in favour of the policy.
Rates go even more negative
One of the most frequent criticisms levelled at the ECB’s policies is that it is running out of ammunition, as its policies have a diminishing impact with interest rates already at record lows.
Some economists argue that negative rates damage the eurozone’s already fragile banking system, and that bond-buying inflates asset prices.
“I am concerned that the negative side-effects of the ECB’s policies are increasing and the marginal benefits are decreasing,” said Danae Kyriakopoulou, chief economist at think-tank OMFIF. “The big lesson from all this is that the ECB needs other policymakers to move.”
The decision to cut the deposit rate further into negative territory was one of the most controversial parts of Thursday’s stimulus package.
However, Mr Draghi pushed back. “People should explain that negative interest rates are a necessity,” he said. “Trust in the ECB ultimately will be based on whether it has delivered on its mandate of price stability or not . . . and the German citizens certainly benefited from the ECB monetary policy for a long time and quite significantly.”
Some help for banks
To counter fears that negative rates will hurt the banks, the ECB announced a tiering system to exclude some of their excess deposits from negative rates.
Mr Ducrozet at Pictet estimated this would cut banks’ cost of negative rates from €9bn a year to €6bn.
The ECB also confirmed plans to offer cheap loans for banks under its third targeted longer-term refinancing operation (TLTRO), sweetening its terms by cutting the cost of borrowing and extending loans’ maturity by a year.
While tiering will help northern European banks that have large excess deposits, the cheap loans will help southern European lenders with higher funding costs.
Mr Draghi said these measures were not subsidies for banks, but were designed to protect the “very important monetary policy transmission channel” that banks provide in Europe.
The next options
Although the ECB used a wide range of tools on Thursday, it does have a few further options left.
Its ability to buy more bonds is restricted by a self-imposed rule limiting it to own no more than a third of any member state’s eligible bonds.
Mr Ducrozet estimated that the ECB could buy €20bn of bonds a month for up to a year before hitting this limit.
But Mr Draghi said the ECB had “relevant headroom to go on for quite a long time at this level without a need to discuss limits”.
The outgoing ECB president also announced that when his successor Christine Lagarde takes office, she will oversee a strategic review.
This would have the scope to examine even more radical ideas, including the possibility of changing its inflation target and even the idea of the central bank paying money directly into individuals’ bank accounts.