Dastgir, Shabbir

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University of Huddersfield RepositoryDastgir, ShabbirExplainer: what is the ECB ‘bazooka’ and will it spur a eurozone recovery?Original CitationDastgir, Shabbir (2016) Explainer: what is the ECB ‘bazooka’ and will it spur a eurozone recovery? The Conversation. ISSN 2044-5032 This version is available at http://eprints.hud.ac.uk/27942/The University Repository is a digital collection of the research output of theUniversity, available on Open Access. Copyright and Moral Rights for the itemson this site are retained by the individual author and/or other copyright owners.Users may access full items free of charge; copies of full text items generallycan be reproduced, displayed or performed and given to third parties in anyformat or medium for personal research or study, educational or not-for-profitpurposes without prior permission or charge, provided:• The authors, title and full bibliographic details is credited in any copy;• A hyperlink and/or URL is included for the original metadata page; and• The content is not changed in any way.For more information, including our policy and submission procedure, pleasecontact the Repository Team at: E.mailbox@hud.ac.uk.http://eprints.hud.ac.uk/Shabbir DastgirSenior Lecturer in Economics, University of HuddersfieldThe European Central Bank has introduced a slate of new measures to try and bolster growthin the eurozone. Some have referred to Mario Draghi, the ECB president, as bringing out his“bazooka”. Faced with the threat of deflation, he is keen to try and boost inflation nearer to itstarget level of around 2% from its current level of -0.2%.The real economy in the eurozone is not doing very well. Real GDP grew at around 0.3%toward the end of last year, weaker than expected by many economists and the outlook for2016 is moderate at best. The ECB hopes its policies will increase demand through financingconditions, increases in employment and structural reform.Here are the three measures that are geared towards increasing the availability of credit,spurring a faster economic recovery and generating a more acceptable level of inflation.1. Interest rates cutThe ECB’s three main interest rates have been cut. The refinancing rate – the interest banksare charged for borrowing from the ECB – has been cut by five basis points from 0.05% tozero. The rate on its marginal lending facility, by which it makes overnight credit available tobanks, has also been cut by five basis points to 0.25%. And the deposit facility – the rate paidto banks for overnight deposits – by ten basis points to -0.40%.All of this is aimed at increasing the liquidity of commercial banks in the eurozone andencouraging lending. By charging banks more to keep deposits at the central bank and less toborrow from it, the hope is that they have less incentive to hold onto their cash.March 15, 2016 10.50pm GMTEPA/Arne DedertExplainer: what is the ECB 'bazooka' and will it spur a eurozone recovery? https://theconversation.com/explainer-what-is-the-ecb-bazooka-and-wil...1 of 3 23/03/2016 16:13Key ECB interest ratesSource: ECB Get the dataThe refinancing rate meanwhile, is likely to remain at the present level or lower for theforeseeable future, because of low inflation and the sluggish recovery.Banks, who are of course at the heart of this lending and credit provision strategy, welcomedthe move and have enjoyed an increase in share prices during trading since theannouncements. They are more confident about avoiding funding problems, because the costof insuring against collapse is lower now that credit easing is being ramped up.2. More quantitative easingDraghi also announced another round of quantitative easing – the introduction of new moneyinto the economy. It is the eleventh attempt to reignite money supply growth since he took thehelm and will increase the current injection of €60 billion a month to €80 billion each month.To facilitate this, the ECB will electronically increase the amount of credit in its own bankaccount and use it to buy assets such as bonds or equities from other banks, a process calledasset purchases. This will continue for at least another year or until the inflation rate returns toits target of less than, but close to 2%. Plus, the ECB is increasing the percentage of theTrigger happy president? EPA/Arne DedertExplainer: what is the ECB 'bazooka' and will it spur a eurozone recovery? https://theconversation.com/explainer-what-is-the-ecb-bazooka-and-wil...2 of 3 23/03/2016 16:13share purchases that it is able to buy, up from a third to a half.Quantitative easing will also be widened to include euro area corporate bonds, which arecredit-rated bonds issued by companies. These are usually bought and sold on secondarymarkets, offering high yields when ratings are low and low yields when ratings are high. Thisshould lead to more money filtering through to what we call the real economy – where goodsand services are actually produced, rather than financial markets where shares are traded.3. Financing for banksA series of targeted longer-term refinancing operations were also announced, to begin laterthis year. Commercial banks will effectively be paid to borrow central bank funds. They arebeing offered funds to lend to consumers and businesses for spending in the real economy(the money cannot be used for mortgages, for example). Banks that participate would payback less at the end of the four-year loan than they borrowed. Liquidity is also offered tobanks which need to continue lending between themselves and to avoid another creditcrunch.So this monetary stimulus, as the ECB is calling it, is an effort to help the eurozone economygrow faster by increasing the amount of money supplied to it. Doubts persist, however, aboutwhether or not the policies explained here will prove successful.Much of the ECB’s stimulus depends on there being sufficient demand for loans, which haslong been questionable. If there isn’t sufficient loan demand, simply making loans cheaper isunlikely to have a significant impact. There has also been speculation in recent months aboutthe health of the banking sector, though not quite another banking crisis just yet. Thesemeasures will help dampen those fears. But the fact that the ECB has had to intercede again,points to how serious such concerns are.EuropeEurozoneEuropean Central BankECBquantitative easingTweet28Share5 Get newsletterExplainer: what is the ECB 'bazooka' and will it spur a eurozone recovery? https://theconversation.com/explainer-what-is-the-ecb-bazooka-and-wil...3 of 3 23/03/2016 16:13

Explainer: what is the ECB ‘bazooka’ and will it spur a eurozone recovery?

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