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05Jun

Opinion: ECB Measures Will Practically Proof Ineffective

von Oliver Korf | 2014-06-05

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Today, the European Central Bank has introduced a number of measures to stimulate the Eurozone economy and to bring inflation up to the targeted 2%. These steps may proof practically ineffective, as there is no way to push money into the economy unless businesses and consumers are ready to borrow, invest and spend it.

Today, the European Central Bank has introduced a number of measures to stimulate the Eurozone economy and to bring inflation up to the targeted 2%. These measures include, inter alia, a cut of the benchmark interest rate by 10 base points to 0.15% and a cut of deposit rates for banks from zero to -0.1%. The latter shall encourage banks to lend to businesses rather than hold on to the money.

These steps may proof practically ineffective, as there is no way to push money into the economy unless businesses and consumers are ready to borrow, invest and spend it.  The mixed results of similar policies in Sweden and Denmark support this notion.

They are also expected to encourage banks to grant more loans by means of a) lowering the banks’ costs of borrowing, b) introducing costs on banks that stash money away rather than lending it out and c) by making it cheaper for banks to borrow from the ECB to fund lending to small and medium businesses.

Actually, the banks would not be sitting on money if they had many credit-worthy business customers looking for loans. Therefore, not policies towards lenders but potential borrowers and spenders are needed, the ones who are holding back because of the limited prospects for growth.

Today’s measures may stimulate European bond and stock markets but affect savers and worse, leave inflation practically unchanged in the coming years.  Looking at the ECB one may ask, if there is actually much room left for further action.

Autor: Oliver Korf

Director CorAd Group

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