42 days ago, Draghi said there were “no limits” to what the central bank will do reach its inflation target of 2% at the ECB’s January press conference.
He hinted that the ECB had the “power, willingness and determination” to take action in March if needs be.
Well, March is here and inflation is still far below target — falling to minus 0.2% in February, dropping back into negative territory for the first time in five months.
And at 1:45 p.m. Frankfurt time (12:45 p.m. UK time) we’ll discover what Draghi has up his sleeve.
Most analysts think the stimulus Draghi suggested is a cut in the deposit rate, which is the rate the ECB pays banks to leave money with it overnight.
At the moment, the rate is minus 0.3%, meaning banks have to pay money to leave deposits with the ECB — something the central bank hopes will stir the big lenders to pump money into the economy, rather than keep it back and reduce their own deposit rates, forcing savers to go out and spend or invest their money.
The issue is the size of the cut — while most analysts think the ECB will go to minus 0.4%, Ben May of Oxford Economics told AFP it could go as low as minus 0.5%.
Top European bankers are worried the ECB would only make things worse with a deposit rate cut. CEO of Austrian bank Erste Bank, Andreas Treichl, told the FT that “savers are risk adverse and capital markets are not very prominent” in his region, meaning “lowering interest rates is not very helpful in stimulating economic growth,” he said.
The other option for the ECB is a so-called tiered negative rate, which would charge banks depending on how much they wanted to deposit with the central bank. This is the model Japan launched earlier this year.
The tiered approach could help Draghi skirt criticism of the negative rate policy, reducing the pain for smaller banks.
Commerzbank economist Michael Schubert told AFP: “If a tiered rate system were introduced, the burden on banks would rise less strongly and the deposit rate could be cut more sharply than if the ECB stuck to a universal penalty rate.”
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