European Central Bank deploys new stimulus tools

 

The European Central Bank took several dramatic steps Thursday to battle the continent’s deflation and weak economic recovery.

The ECB announced that it was taking the rate it pays banks to hold their deposits into negative territory. The negative 0.1 percent actually means banks would have to pay the ECB to hold onto their cash, an effort to spur banks to lend.

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The move is the first time a major central bank has set its deposit rates below zero, a move the United States Federal Reserve has avoided, though Fed officials have mentioned cutting deposit rates as an option.

The European bank also announced that it was opening a 400 billion euro lending program, which would give banks access to low-interest loans as long as the money was then directed toward lending to households and businesses.

The ECB has long been more resistant to drastic measures than the Fed, so Thursday’s actions were viewed as fairly dramatic. And ECB President Mario Draghi made clear the central bank was prepared to do whatever it takes to get the European economy back on its feet.

"We think it is a significant package," he told reporters in Frankfurt, Germany. "Are we finished? The answer is no.”

Draghi indicated that the ECB is also putting together a program of large-scale asset purchases known as “quantitative easing.” That unconventional method, in which a central bank buys large amounts of bonds in a bid to lower borrowing costs across the board and boost economic activity, had been the main tool employed by the Fed to steer the U.S. through its recession and rocky recovery.

The Fed is currently winding down its third round of the practice, slowing the size of its monthly bond purchases with an eye toward eliminating the purchases sometime next year.