The ECB took markets by surprise today, cutting its already microscopic rate even further as the Eurozone continues to struggle. The Bank's reference rate is now 0.05%, down from 0.10%, while its deposit rate is now minus 0.2%. The ECB also announced that it will start buying asset-backed securities next month, although a full QE-type program that would involve buying sovereign debt is still not in the cards.
Will any of this help? The cut in the reference rate is surely no more than symbolic. As for the deposit rate, the linked article notes that the ECB hopes that by making it more expensive for banks to park their cash, it may persuade them to lend more to businesses and consumers. It's equally or more likely that the ECB's evidently dire view of the Eurozone's economic prospects will scare lenders into being even more cautious. And as for the ABS purchases, which are intended to free up balance sheet space, it's not clear who would want to sell relatively secure assets of this type to the ECB and then deposit the funds with the Bank at a negative interest rate.
As in the US, UK and Canada, the balance of monetary and fiscal policy has been wrong for the last several years. Monetary policy is too loose, fiscal policy unnecessarily tight. What sets Europe apart from the other three economies is that while each of the latter has seen at least some resumption of growth in the last couple of years, the situation in the Eurozone only seems to be getting worse. There really does not seem to be much that ECB Governor Draghi can do about it, short of a full QE program, which would not go down well in Germany.... and now there are growing fears that sanctions against Russia and the possibility of disruptions in gas supplies in the coming winter will make things even worse.
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