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  • Dec 26, 2014
  • Updated: 1:46am

European Central Bank

The European Central Bank was established by the Treaty of Amsterdam in 1998 and is headquartered in Frankfurt, Germany. The objective of the bank is to maintain price stability within the euro zone. The president of the ECB is Mario Draghi, former governor of the Bank of Italy.

CommentInsight & Opinion

European Central Bank may need to join the quantitative easing club

PUBLISHED : Tuesday, 10 June, 2014, 4:51am
UPDATED : Tuesday, 10 June, 2014, 4:51am

The European Central Bank has finally moved to counter sluggish growth, persistently high unemployment and the threat of deflation in the euro zone after months of dithering. By its own standards, the measures announced last week - which include taking a key deposit interest rate into negative territory - are bold, even historic. But market reactions have been, well, underwhelming. The bank's chief, Mario Draghi, may be finally doing what is necessary, but is it enough? He himself hinted at outright quantitative easing to come, which he has so far avoided implementing, should the new measures prove inadequate.

"Are we finished?" he asked rhetorically. "The answer is no. If need be, we aren't finished here."

Draghi has been credited with stabilising the euro zone during the most acute phase of the financial crisis when he promised to do "whatever it takes" to save the euro. He is now finding averting a crisis is easier than restoring normal conditions to the weaker economies in the euro zone.

The measures include cutting the bank's benchmark interest rate to 0.15 per cent, from 0.25 per cent; charging commercial banks a 0.1 per cent interest rate on money they deposit at the central bank, in other words making them pay to park money there; and offering loans of up to €400 billion (HK$4.23 trillion) to commercial banks on condition they lend the money to firms rather than buying safe government bonds. The euro did weaken a bit and stock markets in the euro zone rose slightly. One reason is that the ECB moves had been widely expected and already priced in by capital markets.

Critics have pointed out that the amount in deposits those banks have put away with the central bank are not great enough for the negative rate to make a big enough impact. And the benchmark rate cut is not likely to make them lend significantly more than before. In truth, funding for small to medium-sized companies remains at crisis level in the euro zone. Meanwhile, outside Germany, unemployment is worse now than when the crisis first broke, especially for those aged under 25.

It is likely Draghi will have to join the quantitative easing club of the US, Britain and Japan sooner rather than later. While it may be more difficult for the ECB to choose what government bonds and assets to buy from the 18 euro countries, that's the bullet it may have to bite. The markets are certainly expecting it to do it.

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