ECB Fires on Multiple Fronts

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Thursday, June 05, 2014 9.18 PM / WSJ

 

The European Central Bank unveiled a wide range of measures designed to support Europe's gradual economic recovery. But in the absence of single big-shot policy, the central bank—and investors—are still left waiting.

 

This was more scattergun than bazooka. Faced with inflation of just 0.5% and a forecast that it might only reach 1.5% by the end of 2016, the European Central Bank Thursday delivered a rush of policies. They went beyond what the markets had expected in terms of breadth, but not depth.

 

The measures are significant and positive. But they aren't shock therapy. The hope must be that they help support Europe's gradual recovery. The big gun—full-blown quantitative easing—remains a last-ditch option.

 

Investors had envisaged ECB President Mario Draghi choosing between a range of policies to unveil. Instead, the ECB announced pretty much all of them. It cut rates, injected liquidity, announced a plan to boost business lending and said it would work toward being able to buy asset-backed securities outright.

 

The rate cuts were as many expected; the ECB's key refinancing rate was lowered to 0.15% from 0.25% and the rate it pays banks on cash in its deposit facility went negative, at minus 0.1%. These are very small reductions, but the negative deposit rate is still a step into uncharted territory for a major central bank. It should ensure that very short-term euro-zone interest rates are anchored close to zero. But there isn't any more room for maneuver.

 

The ECB also announced cheap long-term loans of up to €400 billion initially that it hopes will encourage banks to lend to companies. The measure, along with the extension until December 2016 of regular lending operations that will supply as much cash as banks want at fixed rates, emphasizes that rates will stay low for a long time yet. But the first operations won't take place until September and December—months to wait until the market can judge bank appetite for this program.

 

And finally, the ECB is stepping up work on outright purchases of asset-backed securities. This, too, is a long-term project, however, as it will require changes to punitive regulatory regimes that are currently holding back issuance.

 

Mr. Draghi said more could be done if necessary, including quantitative easing. But it seems likely that the ECB will want at least to see what the effects of the range of measures it has announced are. Barring a big shock to growth or a sharp deterioration in the inflation outlook, the ECB may well stay on hold.

 

So market reaction was mixed. The euro fell sharply and stocks rose initially, but the move was quickly reversed. The ECB is still dependent on central banks elsewhere—most notably the Federal Reserve—becoming less dovish. That should lead to a weaker euro and reduce the downward pressure on inflation.

 

Given the forces driving inflation in Europe—with downward pressure from government reforms to boost competitiveness and declines in food and energy prices—the euro remains the key factor that ECB policy can affect.

 

But in the absence of a single big-shot policy, the ECB may yet face an uncomfortable wait.

 

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