European Central Bank Acts To Stimulate Eurozone Economy

The Eurozone requires a relatively high degree of alignment from its member economies to enable the single currency that the 19 EU states share to continue to function. This has meant the ceding of a degree of economic sovereignty from these countries to the European Central Bank which is entrusted with protecting the interests of its members.

The ECB has been operating a zero percent interest rate policy since March 2016 in a bid to encourage stimulation of the economy by cheap bank loans (commercial bank loans charge a small positive interest rate, funds deposited by commercial banks with the ECB earn no interest) and has been heavily engaged in an asset purchase programme, although the fresh money investment phase of this ended in December 2018. It had been anticipated that ECB interest rates might start to normalise as early as this summer, but at its March 7th meeting, the ECB ruled this out.

ECB interest rates are set to remain at zero until next year (at the earliest) and the bank announced further stimulus measures to help boost the sluggish Eurozone economy.

ECB president, Mario Draghi, announced that the bank had trimmed its growth forecast for 2019 down from 1.7% to 1.1% and that inflation is now expected to be lower than predicted at 1.2% rather than 1.6% - the target for inflation is 2%. He noted: "We are [in] a period of continued weakness and pervasive uncertainty. The near-term growth outlook will be weaker than previously anticipated".

The bank will engage in a further round of long-term refinancing operations which will provide banks with a source of cheap finance, hopefully enabling them to boost the economy by lending to businesses and consumers (at a mark-up, of course). The new round (known by the abbreviation TLTRO) is set for September 2019.

The ECB asset investment programme saw €2.5 trillion worth of assets purchased. These assets attract interest, of course, and the ECB is continuing to re-invest this income stream in the continued purchase of assets (but without “fresh” money from the bank). The bank signalled that this policy is set to continue for an extended period of time.

The ECB action led to a weakening of the Euro against Sterling and the US Dollar by 0.6 and 0.1%, respectively.

Dr. Mike Campbell is a British scientist and freelance writer. Mike got his doctorate in Ghent, Belgium and has worked in Belgium, France, Monaco and Austria since leaving the UK. As a writer, he specialises in business, science, medicine and environmental subjects.