On Thursday, the European Central Bank took another step further into the uncharted territory of negative interest rates, lowering the benchmark deposit rate paid by eurozone banks to minus 0.4 percent from minus 0.3 percent.
But that was just the beginning of extraordinary policies trotted out by ECB President Mario Draghi after the latest meeting of eurozone finance chiefs. Draghi also announced expanded asset purchases and a large-scale debt refinancing program in an effort to rev the sputtering European economy.
“Conditions have significantly changed since early December,” Draghi said at a news conference announcing the measures. In particular, the ECB’s December estimate of 1 percent inflation for 2016 was slashed to 0.1 percent amid continuing weaknesses in energy prices and emerging markets growth.
For Draghi — who has previously promised to do “whatever it takes” to spur growth and inflation in the eurozone — that means going beyond ordinary central bank tools. With Thursday’s announcements, Draghi said, “the emphasis will shift from rate instruments to other nonconventional instruments.”
Here is an overview of those nonconventional tools that Draghi hopes will help right Europe’s drifting economic trajectory.
Benchmark Rates: Less Is More
On March 16, the rate for deposits held at the ECB will fall a tenth of a percent to minus 0.4 percent. By effectively raising the fee that banks pay to keep reserves at the central bank, the lower deposit rate should ripple out into the broader financial markets, lowering borrowing costs for consumers and businesses alike.
At the same time, the refinancing rate fell from 0.05 percent to 0 percent, reducing what large banks have to pay to borrow on a short-term basis the ECB.
Together, the rate moves continue a slide of European benchmark rates into increasingly negative territory that began in 2014 as a response to persistently weak economic growth. But Draghi told reporters that he and his fellow finance ministers saw no reason that rates should fall even farther, as long as the new facts don’t intrude.
Still, don’t expect the eurozone to pop back to positive rates anytime soon. “Rates will stay low — very low — for a long period of time, and well past the horizon of our purchases,” Draghi said.
In tandem with the lower rates, the ECB said it would beef up asset purchases meant to further stimulate the economy. The central bank’s quantitative easing program will increase to 80 billion euros monthly ($89 billion) from 60 billion euros ($67 billion).
In its asset purchase program, the ECB creates cash out of whole cloth to purchase commonly traded debt instruments, typically government bonds. The new money circulates throughout the economy, boosting spending and padding bank balance sheets.
At least that’s the theory. With Europe still struggling to get out of first gear following the global financial meltdown and subsequent debt crises, prior rounds of quantitative easing haven’t yet achieved their intended effect.
But this time around will be different. The ECB will add investment-grade nonfinancial corporate bonds to the mix of debt it purchases, a shift Draghi said would “further strengthen the pass-through of our asset purchases to the financing conditions of the real economy.”
Finally, Draghi dusted off another unconventional tool that the ECB debuted in 2014, the clunkily named Targeted Longer-Term Refinancing Operations, or TLTRO.
The program is intended to spur productive lending by giving cheaper loans to banks that can show they’re serving borrowers in the real economy. Draghi, who said loan growth was still too low in the euro area, suggested the program could also help spur flagging inflation.
Despite the optimism, the ECB has its work cut out for it. The previous T-LTRO program was seen by many in the financial markets as a disappointment, and loan growth has remained below par.
… And Beyond
In its bullish announcement, the ECB left a few ideas on the cutting-room floor. Discussions around a proposed tiered rate structure meant to protect some banks from revenue loss eventually fizzled, Draghi said. Finance ministers didn’t want to give markets the idea that the ECB saw a case for even lower rates at the present time.
Draghi was also pressed on whether he and his colleagues had considered “helicopter money,” a hypothetical program that would simply ship cash to consumers in order to jumpstart economic activity.
But the proposal, which upstart British politician Jeremy Corbin has suggested to widespread ridicule, hasn’t made it to the ECB’s policy toolkit. “It’s a very interesting concept that’s being discussed,” Draghi said. “Prima facie it involves complexities.”
Despite the ECB’s reluctance to embrace the most radical monetary proposals, the fact that they’re being discussed at all suggests that unconventional central bank policy is here to stay.