ECB Pulls Out The Stops: More Stimulus And Negative Interest Rates

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Summary

The ECB decided to increase QE and double-down on negative interest rates to cope with diminishing eurozone economic growth.

Economic growth has shrunk 17.6 percent during the last 10 months.

This approach is forecast to increase growth by only 0.1 percent by 2018 from the reported December 2015 growth level of 1.7 percent.

Interest rates for bank deposits are scheduled to remain at minus 0.4 percent for a long time.

Is this approach to solve the EU's economic woes a desperate continuation of the previous three years that may result in a race to the bottom?

Review

Earlier this week, I wrote an article published in SA that focused on the economic slowdown in world markets and growing global debt. At the conclusion, I suggested that investors should review important economic reports scheduled for later this week. I included the information from one of those reports, Economic Data From China, in an SA article yesterday.

Introduction

This article concerns a second report this week about policy decisions issued today by the European Central Bank.

ECB: Pulling Out the Stops

Today, October 20, the ECB reported that it will not cut interest rates "holding them deep in negative territory while continuing bond purchases at 80 billion euros per month to take effect in April." The ECB has pulled out all the stops by cutting rates and expanding QE. Corporate bond buying will also be added to the bank's assets.

Draghi kept the deposit rate at minus 0.4 percent and maintained the ECB's guidance for rates to stay at their current negative level.

Going the Stimulus Route

If you fail to succeed, just keep doing the same thing again and again.

The ECB has provided unprecedented stimulus for years with sub-zero rates, free loans to banks and over a trillion euros in bond purchases, all in the hope of reviving growth and lifting inflation back to its target of just below 2 percent after more than three years of misses.

This signals a double-down approach where a QE extension rate may be coming as soon as December because this approach is predicated on "very substantial" money support. ECB economist Peter Praet has warned that, "a premature withdrawal of stimulus would stall and reverse the upswing, a further sign any tampering is well into the future."

Diminished Eurozone Growth

The 19 members of the Eurozone now average 2016 growth levels of 1.4 percent compared to 1.7 percent last December. This represents a 17.6 percent decline in growth over the last 10 months. It is difficult to anticipate further growth in the future with the path taken by the ECB today. Near-term forecasts support this contention.

Eurozone Growth Forecasts

  • 2016 1.4 percent growth
  • 2017 1.7 percent growth
  • 2018 1.8 percent growth

This forecast is for average EU growth to increase by 0.1 percent between last December and 2018 in the face of continued massive monetary stimulus and negative interest rates in a climate of exceedingly low inflation.

Inflation Outlook

  • 2016 0.1 percent
  • 2017 1.3 percent
  • 2018 1.6 percent

This may be optimistic since we are starting from 0.1 percent in 2016. It also does not meet the ECB target of near 2 percent inflation.

Opinion

I am not heartened by the ECB policies stated today. They have not worked before and smack of continued desperation trying to dig out of a hole that only gets deeper. This approach to the EU's economic woes is, in my opinion, a continued process of racing to the bottom in terms of currency manipulation and negative interest rates that can damage the eurozone's currently fragile banking system, which I have discussed in previous articles.

Takeaway

This article and yesterday's article are macroeconomic data I suggested readers review in terms of the first article in this series that was devoted to slowing world markets. As can be seen from the two follow-up articles, China's and the ECB's latest policies are to stimulate, stimulate, and stimulate. Stay tuned for this week's next economic response to slowing global growth.

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The information and data that comprise this article came from external sources that I consider reliable, but they have not been independently verified for accuracy. The points of view expressed are my reasoned opinions, and not investment advice. I am not responsible for any investment decisions you make.

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