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Analysis: Draghi's last fireworks: Everything for the economy

2019-09-12T14:47:58.099Z

TIME ONLINE | News, backgrounds and debates


Frankfurt / Main (dpa) - Shortly before the end of his term, ECB President Mario Draghi once again pulls out all the stops - to the chagrin of savers and banks: higher penalty rates for banks, fresh billions for bond purchases and an indefinite cemented low interest rates.

With the huge package of measures decided on Thursday, the European Central Bank (ECB) is resisting the economic downturn.

A "very expansive monetary policy" remains necessary due to extensive risks to the economy, Draghi explained the decisions after the meeting of the ECB Council in Frankfurt. The key rate remains unchanged at the record low of zero percent, a first rate hike was postponed indefinitely by the Governing Council.

The central bank expects less growth for the euro economy in both 2019 (1.1 percent) and 2020 (1.2 percent) than predicted three months ago. The inflation rate is therefore likely to move away from the 2.0 percent target with 1.2 percent in this year and 1.0 percent next year.

Critics doubt whether the central bank, with the further tightening of its ultra-loose monetary policy for many years, will achieve its goal of boosting the economy in the eurozone and pushing up its comparatively low inflation for years.

Commercial banks will have to pay 0.5 percent penalty interest if they park excess funds with the central bank. Already the previous negative deposit rate of minus 0.4 percent was a burden on the billions for the financial sector. Banks may soon pass the costs on to a larger clientele.

With the penalty rate, the monetary authorities want to bring the institutions, more money in the form of loans to businesses and consumers to boost the economy. In order to relieve the banks at least somewhat, the ECB introduces a graduated rate to exempt certain allowances from the penalty interest.

With a new edition of asset purchases, the ECB wants to help the economy and inflation in addition to jumps. From November 1, 20 billion euros will be invested monthly in the purchase of bonds. This part of the package was controversial in the Governing Council, as Draghi admitted. An exact end of the purchases did not determine the body.

"The even more expansionary monetary policy will do more harm than good," said Sparkasse President Helmut Schleweis. "The negative effects of this policy meanwhile prevail, and at the same time the positive effects have worn off." Criticism also came from federal politics. CSU politician Hans Michelbach said: "The ECB is administering an even higher dose of medicine that has not worked in the past."

The president of the BdB, Hans-Walter Peters, sees the ECB with its Latin in the end: "The ECB is reminiscent of a motorist who raises the impasse in a dead end."

At the end of December, the ECB had ended its massive purchase of government and corporate bonds for the time being. Since January, no fresh ECB money has flowed into this framework, but funds from expiring securities are being reinvested. From March 2015 to the end of 2018, the ECB invested around € 2.6 trillion in bonds.

"With the resumption of bond purchases at the present time sends the Council a dangerous signal to euro countries such as Italy," said ZEW economist Friedrich Heinemann. "These may obviously rely on a permanent financial aid from the ECB."

The purchase of government bonds helps governments to get cheaper fresh money. Because when the ECB buys large amounts of money, states do not have to offer such high interest rates for their securities. At the same time, the central bank is pumping a lot of money into the market via asset purchases. That should drive inflation.

In the medium term, the ECB is aiming for a rate of inflation of just under 2.0 percent for the eurozone. That's far enough away from the zero mark. Because permanently low prices are seen as a risk to the economy: companies and consumers could postpone investment in the hope that it will soon be cheaper.

However, the two-percent target of the ECB has become a distant one: in August, inflation in the 19 eurozone countries remained at 1.0 percent, the lowest level in more than two and a half years.

There was "neither economic nor political" a crisis that justified such "serious measures" of the ECB, criticized Klaus Wiener, chief economist of the General Association of German Insurance. At the same time, the side effects of the expansionary monetary policy are becoming increasingly apparent.

Savings are virtually eliminated, private retirement is becoming increasingly difficult. "Bubbles in the real estate market are just as much the consequence as the plight of the citizens, who no longer know how to provide for their old age," said the chief executive of the VÖB, Iris Bethge-Krauß. In addition, banks would be weakened, because the industry break in the low interest income.

On the stock exchanges, however, the ECB package caused price jumps, the euro fell after announcing the decisions on Thursday to a daily low. As in June, US President Donald Trump responded promptly: "The ECB is successful in depreciating the euro against a very strong dollar and hurting US exports," Trump tweeted. Asked about Trump's tweet, Draghi said the ECB's policy is not aimed at exchange rates.

In all likelihood, the expansionary direction of monetary policy in the euro area will not change that quickly: Draghi's designated successor to the head of the ECB, the Frenchwoman Christine Lagarde, has already made it clear that she considers a very loose monetary policy to be necessary in the foreseeable future. However, the former head of the International Monetary Fund (IMF) also said: "We must keep an eye on the negative consequences and side effects." Draghi's eight-year term ends on October 31, 2019.

Time series ECB interest rates

ECB purchase program

ECB interest rate decision 12.9.2019

Draghi inaugural statement 12.9.2019

Interview BdB chief executive Krautscheid and others on penalty interest

Biallo at penalty interest

CSU boss Söder in the "Bild" newspaper at penalty rates

Communication Verbraucherzentrale Bundesverband on penalty interest

FAS interview Bundesbank President Weidmann (with payment barrier)

Eurostat on inflation in the euro area

Federal Statistical Office on Inflation Germany

Tweet US President Donald Trump

Source: zeit

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