FRANKFURT — The European Central Bank has reached again for the monetary bazooka.
It took a series of steps Thursday to try to use its powers as the monetary authority for the euro to support the economy, which is facing headwinds from market turbulence and a growth slowdown in China.
Most of all, it wants to drive up inflation. Annual consumer price inflation is minus 0.2 per cent in the countries that use the euro, far from the bank’s goal of just under 2 per cent.
Here’s a quick look at what the ECB’s 25-member governing council agreed to do and what it means.
MAIN REFINANCING RATE
The ECB cut its benchmark interest rate, the main refinancing rate, to zero from 0.05 per cent.
This rate is what the ECB charges banks to borrow from the central bank, and steers the price of credit more broadly. The decrease to the interest rate is so small, and the rate was already so low, that the impact of the cut to zero is questionable.
The ECB lowered the rate on deposits that commercial banks keep at the central bank to minus 0.40 per cent from minus 0.30 per cent.
In practice, this means banks have to pay even more to park their excess cash at the ECB. The reasoning behind the cut is to encourage banks to not leave their money unused in the ECB vaults, but to push them to lend it.
CHEAP LOANS FOR BANKS
The ECB will offer banks loans at zero interest, for as long as four years.
That’s aimed at giving banks long-term financial security. The money also is tied to incentives to loan more.
Giving banks financial support helps offset fears that the negative deposit rate will hurt their profits. In fact, if a bank lends enough to companies, it could see the interest rate reduced to as low as minus 0.4 per cent. That means the ECB would be paying the bank to borrow from the central bank.
MORE BOND PURCHASES
The ECB increased its monthly bond purchases to 80 billion euros ($87 billion) from 60 billion euros.
The ECB has since last year been buying government and some extra-safe private-sector bonds with newly created money _ something it can do as the legal issuer of the euro.
Increasing the amount of money in the financial system hopefully should increase lending and drive up inflation.
The ECB also added corporate bonds to the list of assets it can purchase.