The European Central Bank’s decision to reduce the interest rate on deposits at the central bank to minus 0.10 per cent went as far as even the most ardent doves could reasonably have expected. Rates can probably fall no further. As Mario Draghi, the ECB president, said: “For all practical purposes, we have reached the lower bound.”
For that reason, the more technical elements of the package announced yesterday in Frankfurt are in some ways the most significant. There was a €400bn injection of liquidity, in what the ECB called a “targeted longer-term refinancing operation” – a near copy of the Bank of England’s Funding for Lending Scheme. There was a form of quantitative easing, in which the central bank will buy securities backed by private sector loans. And there was the cessation of a “sterilisation” exercise, which had previously damped the monetary effect of the ECB’s purchases of government bonds.
Unlike the interest rate, which is now as low as it can go, all of these measures could be intensified if the eurozone recovery continues to disappoint. “We are not finished here,” Mr Draghi said, hinting at the possibility of further action “if need be under our mandate”. This statement was unanimous, and therefore presumably supported by the Bundesbank, the arch conservative among the eurozone’s national central banks. It reduces the risk that the ECB will become trapped in a deflationary cycle, as Japan did in the 1990s.