ECB negative interest rates—five expert views

The European Central Bank has cut its main interest rate to 0.15 per cent, and imposed an interest rate charge of 0.1 per cent upon banks leaving money in the ECB (as opposed to the traditional practice whereby central banks pay interest on such reserves). ECB governor Mario Draghi has also indicated a willingness to engage in “asset purchases” (quantitative easing) if the ECB deems fit. The ECB sees no immediate crisis any longer—either with Eurozone sovereigns or with banks. Neither does it appear, yet, to believe falling prices—deflation—in a few Eurozone member states is especially damaging.

Its actions are more motivated by the sense that the Eurozone’s growth recovery continues to be very slow and unemployment very high, when the performance of international peers such as the UK demonstrates that faster growth and lower unemployment should be possible, without too severe a risk, at least in the short term, of inflation rising sharply.

Andrew Lilico, Economist with Europe Economics, and Chairman of the Shadow Monetary Policy Committee

Though the ECB's move was widely expected, it is a major departure for what is traditionally the most conservative central bank. The spirit of the pre-euro German Bundesbank with its commitment to "hard money" is truly dead. It is questionable if what is happening in the eurozone can be described as "deflation".

Will the new policy be successful? It will eventually raise eurozone inflation, though more will have to be done to achieve this. Cutting interest rates may not be enough and, in spite of its reluctance, the ECB may still be forced into QE.

But even if the ECB raises inflation, it is doubtful if higher inflation will deliver higher growth. Boosting demand may have limited benefits by weakening the euro. But a sustained improvement in eurozone growth can only be achieved by structural reforms, which will enhance the supply potential and competitiveness of the economy.

David Kern, Chief Economist, British Chambers of Commerce

The ECB did quite a lot today, at the higher end of expectations. For it to succeed, they will need a further easing of overall financial conditions, which in particular a decline in the overvalued euro and a further rise in equities, will be key. I would give a fighting chance to this occurring.

Jim O’Neill, former Chief Economist at Goldman Sachs, is an Honorary Professor of Economics at Manchester University

Unfortunately, the ECB's move to negative interest rates for deposits held by banks at the central bank is more of symbolic than practical importance. In itself, it's likely to do little to restart bank lending in the eurozone. More significant is the recent fall in the euro, which will provide some boost to exports. Draghi's announcement that the ECB is undertaking "preparatory work" for quantitative easing is welcome, but long overdue—after all, quantitative easing is half a decade old in the UK and US.

Considerably more radical action, both from the ECB and national governments, is required to get the eurozone out of its prolonged period of economic stagnation combined with unacceptably high levels of unemployment. With inflation under 1 per cent, the ECB not only can but should do much more.

Jonathan Portes is Director of the National Institute of Economic and Social Research

The ECB reduction of the rate it pays banks on deposits from zero to -0.10 per cent was widely expected. It was accompanied by other measures designed to strengthen lending and liquidity, including an announcement that the ECB was looking at introducing a programme to buy asset backed securities—a form of quantitative easing—but not involving government bonds. This may come eventually, but the ECB is clearly not ready or willing to do this yet.

The negative deposit rate, designed to encourage banks to lend, won't work. It wouldn't have done much to spur depressed loan demand anyway but banks' deposits at the ECB have fallen to almost zero, and so the effectiveness is further undermined.

Two things we know. First the ECB's actions today show how concerned it is about deflationary risks and the feeble eurozone economy. Second, the measures are most unlikely to lift euro area inflation back to the 2 per cent target or cause the euro to fall significantly. The ECB doesn't have the scope to address the eurozone's problems but to the extent it has a role to play, it'll be back with more QE sooner or later.

George Magnus is Senior Independent Economic Adviser, UBS