This Week's Focus: ECB: I have good and bad news.
Friday, 11 of March 2016
This week focus
At its meeting on Thursday, March 10, the ECB took further expansionary monetary policy measures announced by the mouth of its president, Mario Draghi. These measures aim to combat low inflation and boost economic growth in the euro zone.
The good news
The measures consist, in summary, in three performances:
- On the side of asset purchases, the volume will increase to 80,000 million euros per month, instead of the current 60,000. In addition to buying in the markets of public debt and mortgage bonds, the novelty is that you can also buy bonds issued by companies, provided they have credit rating of investment grade.
- In the financial sector, the ECB will penalize further deposits of financial institutions, charging them 0.4% annual interest. With this measure, the ECB claims that the banks in the financial system of the European Union lend more money to households and businesses.
- In the same vein, as a novelty, introduced a financing program conditional lending (Long-Term Refinancing Operations Targeted) by which it pays interest of 0.4% to banks that ask for credit up to 4 years. Thus rewards credit granting institutions while punishing those that do not.
The bad news
In this world upside down, in which you pay for deposit money and get paid for credit request, it seems clear that something is not working as it should. The distortions on the allocation of assets by the investor, already trailing long, do not help that these measures achieve the intended effect because it does not lower the uncertainty about the real state of the economy, a key factor that has trust and investment and consumption decisions more rational basis taken.
In his appearance, Draghi acknowledged that the economy of the eurozone is not on the right track. Thus, the ECB has lowered its forecast for growth Eurozone GDP at -0.3% from an expected 1.7% growth for 2016 to 1.4%, but with an inflation rate of just 0.1% instead of 1% previously forecast. Also lower growth figures and expected inflation for 2017 and 2018.
This, in plain terms is tantamount to admitting that the Eurozone is stagnating and that despite the measures taken so far are not able to generate the desired inflation.
The effects of poor expectations of rising prices or inflation are generally bad for economic growth, since consumer decisions may be postponed important to the belief that it will be cheaper to purchase those goods or services in the future. This, in turn, slows business investment. As a result of both processes, GDP, which about 90% is consumption plus investment, grows less than expected.
The question to be asked is twofold: despite the stress tests, banks are so bad there that almost force them to lend money? On the other hand, if the amount of poured money so far in the economy and interest rates to zero, families and businesses do not consume, invest or borrow does the problem is the cost and the amount of funding or another nature and by far made by the ECB will not be solved only with monetary policy?
We believe that the lack of confidence after the financial crisis of 2008, is behind the weakness of the economy and many euros you release the ECB, the behavior of households and companies will not easily change.