#ECB: €80 billion in QE and reduces interest rates, but could more be done?

By Catherine Feore

Today (10 March) the European Central Bank (ECB) expanded its asset-purchase programme (QE) to €80 billion per month. The ECB added a ‘corporate sector purchase programme’ to the list of assets it can acquire, more details on how this will work will be published soon. The bank also lowered interest rates and launched a new series of targeted longer-term refinancing operations (TLTRO II). The new operations aim to incentivize bank lending to the real economy.

The bank’s actions to date may have prevented the worst, but we are still a long way from hoping for the best. So far, the instruments haven’t resulted in much of a kick to Europe’s moribund economy. Demand remains very low, and, while there are some signs of a subdued recovery, it is patchy and weak. At the moment, the European Commission’s economic forecast looks optimistic in the face of many challenges.

ECB President Mario Draghi (pictured) pointed to “mildly expansionary” fiscal policy as helpful; however, the EU is still insistent on imposing the growth and stability pact – though a better moniker might be the decline and instability pact. When the economy is so obviously in need of stimulus and there are plenty of good investments to be made at exceptionally low interest rates, it is both willful and negligent to cling to the current fiction of ‘growth-enhancing fiscal-austerity’.

The QE programme has been operating in the eurozone for almost a year. Evidence shows it is failing, headline inflation dropped to -0.2% in February. Draghi noted that he anticipates that inflation will rise to the 2% level by the end of this year.

Many people have been thinking about how the ECB could stimulate demand through more direct and proven monetary methods. One idea is to adopt a ‘Quantitative Easing for People’. We spoke to Frances Coppola, an influential writer on these matters, at an event organized by the Campaign for People’s QE:

The concept of People's QE includes so-called helicopter money, whereby the central bank would distribute money directly to citizens and/or conduct monetary financing for public investments in the eurozone. When asked about helicopter money today Draghi claimed – rather incredibly – that they had not thought or talked about this option and said that prima facie it would involve accounting complexities.

We spoke to Eric Lonergan about helicopter money in February:

The QE for People campaign coalition has called on the ECB to carry out a comprehensive assessment of the potential impact of more direct monetary policies for the eurozone economy. The proposal has made its way to the European Parliament. Polish MEP Dariusz Rosati (EPP) raised the question directly to Mario Draghi at a plenary session of the Parliament, asking for the ECB to make a thorough analysis of all possible consequences of the helicopter-money measure, in case it would have to be implemented.

The former member of the Polish Central Bank's monetary Committee emphasized that “the ECB is not running out of options, but it must innovate and take bolder steps to stimulate the real economy. Helicopter money, after a throughout analysis of the ECB, might indeed be one of the possible solutions”.

Another issue at the heart of the ECB’s current approach is fairness. Analysis in the US and UK has found that current QE benefits those on higher incomes and exacerbates inequality. Yet again, the EU’s approach means that those on lower incomes will suffer most. People on lower incomes got to pick up the bill for a reckless party in the financial sector that they didn’t get to attend, people on lower incomes were the principle victims when public services were withdrawn in the name of austerity and people on lower incomes are the main group to suffer from the abysmally low level of demand that has been plaguing Europe. So what form of QE we use isn’t just a question of effectiveness, it is a question of fairness.

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.

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