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ECB steps into the unknown

Thursday, June 05, 2014 - 02:20

June 5- The European Central Bank enters uncharted territory by imposing negative interest rates on its overnight depositors, seeking to cajole banks into lending instead and to prevent the euro zone falling into Japan-like deflation. As David Pollard reports the prospect has not gone down well in Germany.

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He looks like any other man in a suit - in fact, he's something of an explorer. Mario Draghi is going where no other major central bank has been before. Into negative interest rate territory. To force commercial banks to lend, Draghi's policymakers cut the ECB's deposit rate to minus 0.1 per cent. Banks will have to pay to store their money with the ECB. The main lending rate was cut by the same amount. And the marginal lending rate - that's the interest charged on overnight loans by the ECB - by 35 basis points. That wasn't all. SOUNDBITE (English) EUROPEAN CENTRAL BANK PRESIDENT, MARIO DRAGHI, SAYING: ''In order to support bank lending to households and non-financial corporations excluding loans to households for house purchases we will be conducting a series of targeted, longer term refinancing operations, TLTROs.'' Those loans are part of a 400 billion euro scheme to squeeze more liquidity into the system over the next four years. Just what many in the market had been calling for. Growth at just 0.2 percent in the first quarter, weak lending and lacklustre consumer spending top the symptoms of an economy still only just out of intensive care. And persistently low inflation adds to other worries, says Jeremy Stretch of CIBC. SOUNDBITE (English), JEREMY STRETCH, HEAD OF CURRENCY STRATEGY, CIBC, SAYING: ''The other key problem of the euro zone continues to be the weakness of the labour market. And so a deflationary environment adds to the pressure on the labour market and adds to pressures on the politicians who, of course, in recent elections saw a fairly significant rump of voters voting against the status quo in terms of Europe.'' Voters who are savers now have another complaint. Especially in Germany. It's simply not worth putting money aside. SOUNDBITE (German) PETER MALZMÜLLER SAYING: "I don't save anymore. Not a cent. I cancelled all my accounts and have it all in a private box. So the state cannot steal from me." Other investors had been calling for a ''big bazooka'' - large-scale asset purchases or QE. That's still an option and could still be needed. Interest rates for smaller businesses - especially in the euro zone periphery - are still punitive. And consumers show little sign of wanting to borrow until their wages go up.

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ECB steps into the unknown

Thursday, June 05, 2014 - 02:20