After refusing at its 12 March meeting to cut interest rates deeper into negative numbers, the European Central Bank (ECB), has few tools left to keep propping up the Eurozone’s economy.
ECB president Christine Lagarde admitted the negative interest rates “have significantly reduced the scope” to cut rates deeper.
Even if the bank were to further cut rates, the effect would be “quite meager,” said Vitor Constancio, former vice president of the ECB.
The continent’s bank regulators have delayed 2020’s stress test and eased capital reserve rules, so banks could let out more money into Europe’s flagging economy.
Some economists think the ECB might cut rates again now that the euro has gained value recently, making the continent’s exports more expensive around the world.
Many policymakers, however, adamantly oppose deeper cuts, arguing they would do little good while jeopardizing the soundness of European banks even more than the negative rates already have.
Instead of cuts, the ECB will lower other rates for commercial banks, initiate a new program of cheap loans to banks, and expand its own bond-buying spree by an additional €120 billion.
In announcing the measures, Lagarde sparked a bond sell-off when she said it’s not the central bank’s business to react to movements in the government bonds market.
She has expressed frustration that the ECB continues to be seen as the chief defender of Europe’s economic well-being and is seeking to galvanize national leaders to do more.
