ECB ready to cut rates and push banks into lending to boost euro zone economy

Wed Jun 4, 2014 7:08pm EDT
 
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By Eva Taylor

FRANKFURT (Reuters) - The European Central Bank is poised to impose 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.

At its meeting on Thursday, ECB policymakers may also launch a loan program for banks with strings attached to make sure the money actually gets out into the euro zone economy.

It will be the first of the "Big Four" central banks - ECB, Bank of England, Bank of Japan and U.S. Federal Reserve - to go the negative interest rate route, essentially charging banks to deposit with it.

Even though the risks are limited of the euro zone entering a spiral of falling prices, slowing growth and consumption, the ECB is increasingly concerned that persistently low inflation and weak bank lending could derail the recovery.

The economy grew just 0.2 percent in the first quarter, and euro zone annual inflation unexpectedly slowed to 0.5 percent in May, official data showed this week, piling additional pressure on the central bank to step in.

"Consensus for action is high so there is a ... risk the ECB under-delivers relative to the market's lofty expectations," said Andrew Bosomworth, a senior portfolio manager at bond fund Pimco in Munich.

Since ECB President Mario Draghi last month signaled the Governing Council's readiness to act in June, policymakers have come out in force to discuss the ECB's toolbox, feeding expectations that a broader stimulus package is in the making.

This is likely to consist of a cut in interest rates, which would push the deposit rate for the first time into negative territory and the offer of longer-term loans linked to further lending. Large-scale asset purchases remain a distant prospect.   Continued...

 
The headquarters of the European Central Bank (ECB) are pictured in Frankfurt June 6, 2013.  REUTERS/Ralph Orlowski