Dr Shane Oliver
Head of Investment Strategy and Chief Economist
The European Central Bank (ECB) grabbed headlines in early June with the announcement of a range of additional stimulus measures in order to boost bank lending and protect against the risk of entering a deflationary environment.
The measures include:
Reducing the key interest rate from 0.25% to 0.15%;
Introducing negative interest rates for bank deposits at the ECB;
Developing a new long-term lending program for banks; and
Commencing preparations for an asset buying program.
We take a look at what this means for investors below.
Reducing the key interest rate from 0.25% to 0.15%
Cutting the interest rate to 0.15% is intended to boost confidence – encouraging a pickup in consumer spending and in doing so, helping to create jobs and increasing economic activity. This should be good for investors in European share markets.
Introducing negative interest rates
The ECB has cut the interest rate that banks receive on their deposits held with the ECB from zero to -0.10%. This effectively penalises banks that have their cash on deposit at the ECB and encourages them to lend it out. On its own this move will directly have little impact as bank deposits at the ECB are very low. However, the impact really comes about via the signal its send to banks and the broader community – it wants banks to lend.
Developing a new long-term lending program for banks
In order to help stimulate bank lending, the ECB has announced a new long-term lending program to banks called Targeted Long-Term Refinancing Operations (TLTRO). Under this unprecedented move banks will be able to borrow from the ECB to fund their non-mortgage lending at just 0.25% for four years.
Preparations for an asset buying program
Finally, the ECB has paved the way to implementing a US-style quantitative easing program whereby the ECB will purchase private sector asset-backed securities. There looks to be a bit more work to do before this will happen though.
These measures signal a big move in the right direction for Europe which has only seen a relatively weak recovery from the global financial crisis, unlike the US. The ECB’s measures aimed at boosting bank lending have a good chance of succeeding and their “whatever it takes” commitment definitely adds to investor confidence that the Eurozone economic recovery will pick up pace over the year and that deflation will be avoided.
This is good for the European economy and hence for investors in European shares and property. It’s also good for the global economy. One thing to keep an eye on though is the Euro as more monetary easing in Europe may put downwards pressure on the Euro versus higher yielding currencies like the Australian dollar.
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