At last week´s Governing Council´s meeting, the ECB decided to further lower its deposit facility interest rate from -0.2% to -0.3% (effectively charging banks for keeping their money at ECB´s vaults). The decision came at a time when eurozone´s inflation is close to 0% and nowhere close to the “below, but close to 2%” official target of the central bank. The ECB expects this year´s inflation to barely hit 0.5%, about 1% next year and 1.6% in 2017 – still far below the target. To tackle the potentially dangerous prolonged period of low inflation, if not deflation, the ECB initiated this year a quantitative-easing program. Each month, the central bank buys €60 billion worth of state bonds, thus injecting new money into the economy. To make the program more powerful, ECB President Mario Draghi announced that the central bank would also buy local and regional bond of the eurozone countries. The program was also prolonged by 6 months – it is now expected to conclude in March 2017. However, the president made it clear this date, as well as some of the program´s characteristics remain flexible – meaning that future development could trigger further changes. Mr. Draghi stated that changes to the QE program are not sings of the program´s failure. On the contrary, he added, the program obviously works and was beefed up to work even better. According to the ECB, the inflation would be 0% this year without the program.
The financial markets reacted coldly to ECB´s announcements. Interest rate change and QE parameters changes were expected. However, the markets obviously expected a more radical change. The exchange rate against US dollar remains at 1.08 USD/EUR, way lower than 1.21 USD/EUR in January.
20th February 2019
25th January 2019