European Central Bank Closer To Quantitative Easing
The European Central Bank’s unprecedented moves made waves across Europe last week. European savers have received increasingly dismal news regarding the safety of their savings in recent months, only underscored by the recent decision to slash rates.
ECB president Mario Draghi increased rhetoric and said central bankers would be “unanimous” in backing more radical measures, like quantitative easing, to cope with a “too prolonged period of low inflation.” The ECB has become much more willing to take the more radical measures that the Fund has long called for.
“Six months ago, I only envisaged broad-based government bond purchases if inflation remained just under zero for a number of consecutive months,” said Jörg Krämer, a chief economist at Commerzbank. “In the meantime, though, the barrier to making these purchases is [now] much lower,” he continued.
Mr Draghi divulged that there was “an ample and rich discussion” about not only QE, but other unconventional measures, like negative deposit rates, which basically amounts to a tax on deposits at the ECB.
“Overall our impression is that the ECB is not in a hurry to deploy further easing measures,” said Philip Shaw, an economist at Investec. “We also remain skeptical of the potential of starting QE, not least because of the objections within Germany which would be raised,” he added.
“In the United States, the effect of QE is immediate on all the asset prices, and the effect of the term premium is also quite direct, because it’s an economy based on capital markets,” Mr Draghi said. “In our case it’s an economy based on the bank lending channel and … the programme has to be carefully designed in order to take this element into account.”
The negative deposit rate means that the ECB will now charge the region’s banks to hold onto their reserves, instead of paying the banks. The central bank says this is to ramp up lending, but really the banks will likely pass this cost onto consumers.
“Today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy,” Mario Draghi, the ECB’s president, said in a news conference in Frankfurt.
German media is not happy about the decision. Frankfurter Allgemeine Zeitung declared the decision a “historic watershed” that offered little hope for “German savers clinging to their savings plans and life insurance.” The left-leaning Tageszeitung put forth that it was time for readers to take some risks with their money – such as buying stocks or playing Blackjack. The tabloid Bild, Germany’s largest-circulation paper, asked at the top of page one: “How bad will old-age poverty get?””
There is no doubt that the decision by the ECB to head towards negative interest rates and closer to QE has shaken the core of Europe, adding more to the anti-Europe/pro-Europe mentality that is gripping the nation.
Buying gold has never been more timely. Nation-states are racing each other to the bottom, seeing who can print the most amount of fiat money before the game is over.
