EUROPE’S central bank has an “unspoken” policy to reduce the euro by 10% to stave off a deflationary spiral in the eurozone, analysts say.
Mario Draghi, president of the European Central Bank, last week launched a package of measures to kickstart the eurozone recovery, as predicted by The Sunday Times.
He slashed deposit rates further into negative territory and announced a multibillion-euro plan to boost bank lending, seen as a first step towards full-scale quantitative easing (QE).
European equity prices hit six-year highs after the announcement, and the euro sank 1.6% to trade below $1.30 for the first time in over a year.
“The message is implicit, but the framework [of Draghi’s package] gives the ECB an indirect foreign exchange policy. At the very least, it appears to be trying to take the euro lower,” said Mark Wall, chief economist at Deutsche Bank.
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Draghi has been spooked by figures showing that inflation in the eurozone dipped to just 0.3% in August, while GDP growth stalled. ECB staff cut their projections for growth and inflation this year to just 0.9% and 0.6% respectively. The ECB announced a cut of 10 basis points in all its key interest rates, taking the lending rate to 0.05% and the deposit rate to -0.2%. Banks are in effect being charged to hold money with the ECB.
Draghi also announced plans to buy up bundles of bank loans called asset-backed securities, as well as euro-denominated covered bonds, from October.
The QE-lite programme is designed to take assets off banks’ balance sheets, freeing them up to lend to businesses. It stops short of the full-blown programmes launched by the Bank of England and the US Federal Reserve because it does not buy sovereign bonds.
Draghi hinted that the asset-purchase plan, alongside an earlier programme to advance €400bn of cheap loans to banks, could pump as much as €1 trillion into the European financial system. Wall said that every €100bn expansion of the ECB’s balance sheet could lead to a 1% decline in the euro.
Analysts remain sceptical the latest measures will succeed, forcing the ECB to embark on full-scale QE later this year or next. “The overall impression is still one of a central bank fiddling around the edges,” said Jonathan Loynes of Capital Economics.