It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.
Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting. With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain. The ECB’s target rate of inflation is just under 2%.
Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month. Apparently, as long as someone is following easy money policies, the markets are happy.
The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds). That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.
Forward guidance, as we’ve previously explained, is simply the act of talking about what the central bank will do in the future. Keeping interest rates low, for example, by saying that the ECB will keep interest rates low.
Banks to Pay for Deposits
The most significant action announced by the ECB was to lower the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.
In other words, banks will pay a fee on money they fail to lend out. Whether or not that stimul