Draghi keeps QE on table as rates go below zero

ECB chief Mario Draghis measures will effectively penalise banks that choose to sit on idle balances. Picture: Reuters

The ECB chief, who had been under intense pressure to deliver something extraordinary after months of hinting, said: “We aren’t finished here.”

His refusal to rule out bond purchases came despite a combination of negative interest rates and asset purchases that was well-received by the markets.

Craig Erlam, a market analyst at Alpari, said: “There’s been a lot of speculation recently about whether Draghi would bring the bazooka to [yesterday’s] meeting.

“As it turns out, he rolled up in a tank dressed like Rambo armed with everything from guns to grenade launchers.

“I don’t think anyone could have anticipated what was coming, as Draghi and the ECB opted against choosing between the selection of monetary tools available and instead went for them all.”

The ECB will start charging eurozone banks to deposit money with it overnight, while pouring cash into a four-year €400 billion (£324bn) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the single currency zone.

Other steps include extending the duration of unlimited cheap liquidity for eurozone banks, injecting about €170bn by stopping tenders that withdrew funds spent on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small businesses.

Draghi said the ECB’s governing council had been unanimous in backing the measures, and could even go further in the coming months. He said the bank could still try quantitative easing if inflation and growth failed to pick up.

“If required, we will act swiftly with further monetary policy easing,” he said. “The governing council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation.”

The ECB’s flurry of activity contrasted with the Bank of England, where policymakers kept rates on hold, as had been widely expected.

Chris Williamson, chief economist at Markit, said: “While the Bank of England pulled no surprises at its monthly policy meeting, the European Central Bank went further than expected, taking out a policy ‘shotgun’ to hopefully kill off the threat of deflation.”

Figures released earlier this week showed that inflation in the eurozone had dropped to just 0.5 per cent, and economists have been warning that Europe is in danger of falling into a Japanese-style deflationary spiral of low growth and falling prices.

But the Centre for Economics and Business Research (CEBR) said the rate cuts would not cure Europe’s deflation threat.

CEBR economist Danae Kyriakopoulou said: “We continue to believe that low inflation in the eurozone is more of a symptom than the real disease.

“For periphery countries, it simply reflects their strive to improve competitiveness in a monetary union. This effectively means lowering costs and wages, which consequently lead to lower prices.”