Arab Today, arab today having steered open crisis ecb navigates dangers
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Having steered open crisis, ECB navigates dangers

Arab Today, arab today

Arab Today, arab today Having steered open crisis, ECB navigates dangers

President of the European Central Bank attends a press conference
Paris - AFP

The European Central Bank unveiled a new arsenal of monetary policy weapons on Thursday, this time aimed not at calming panicked markets threatening the eurozone, but the more subtle danger of deflation.
"We are not in a moment of acute crisis but something more concealed and potentially more dangerous," said Isabelle Job-Bazille, director of economic research at French bank Credit Agricole.
ECB chief Mario Draghi rolled out an unprecedented package of measures, including negative interest rates and targeted measures to kickstart lending to businesses, as well as indicating plans for a limited foray into asset purchases similar to those by US, Japanese and British central banks.
Draghi is widely credited with saving the euro two years ago when panicky markets threatened to push countries into defaults that could have led to a complete collapse of the eurozone.
At the time, he announced the ECB was ready to step in and buy eurozone bonds on a massive scale if necessary -- a promise which calmed markets and helped ensure that such intervention was not actually necessary.
At first glance the eurozone seems to be in a much better situation: bailed-out countries have weaned themselves off international aid and growth is returning.
But "the recovery is very fragile, very weak", said Job-Bazille.
With unemployment high and lots of slack in the economy, the gradual drop in inflation has raised concerns that an unexpected shock, like a sharp slowdown in China or a full-blown conflict in Ukraine, could push the eurozone into outright deflation.
Eurozone inflation slowed to just 0.5 percent in May, a long way off the 2.0 percent that the ECB defines as price stability, and growth came in at an anaemic 0.2 percent in the first quarter.
Policymakers and markets had been looking for the ECB to take some action, both to guard against deflation and spur bank lending, the slow pace of which has been holding back a recovery.
"It is better to prevent than treat deflation," said Job-Bazille.
During a period of deflation, or a sustained period of falling prices, people and businesses tend to postpone purchases while hoping for further price declines in the future.
It can thus push an economy into a vicious spiral of falling growth and rising unemployment that is notoriously difficult to reverse.
Japan has only just managed to extract itself from two decades of deflation with a massively expansionary fiscal and monetary policy.
- ECB faced 'economic urgency' -
While not exactly quick off the blocks -- or as bold in its actions as the Bank of Japan --  the ECB has followed through on plans it had earlier outlined for tackling deflation.
It lowered rates overall, including taking the deposit rate into negative territory for the first time, to minus 0.10 percent.
By moving the rate at which the central bank pays commercial bnks for depositing their unused cash into negative territory, they will thus be charged for parking funds at the ECB, hopefully prompting them to instead lend it to businesses and consumers.
Banks will be able to tap up to 400 billion euros ($550 billion) that they should lend to businesses, and the ECB said it was stepping up preparations to begin purchasing asset-backed securities.
This is far from the massive asset purchases undertaken by the US Federal Reserve, Bank of England and Bank of Japan, but it would be major step for the ECB.
Targeted purchases of securities linked to commercial loans might help banks step up lending. It also allows the ECB to avoid purchasing government bonds, which put it on thin ice given its mandate not to directly finance governments.
The ECB's measures were "exceptional and certainly respond to the economic urgency that has yet to be understood by all," said analyst Christopher Dembik at Saxo Banque

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Arab Today, arab today having steered open crisis ecb navigates dangers Arab Today, arab today having steered open crisis ecb navigates dangers

 



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