More than five years after the U.S. Federal Reserve, the Bank of Japan (BOJ) and the Bank of England (BOE) slashed rates to technically zero, the European Central Bank (ECB) followed suit last week, cutting its benchmark refinancing rate to 0.15 percent.
The four major central banks in the world – the Fed, the ECB, the BOJ and the BOE – are now all in the unprecedented situation of employing ZIRP (Zero Interest Rate Policy), yet the global economy is neither in the depth of a financial crises, nor recession.
Although ECB President Mario Draghi didn’t exclude another small cut in rates, he said that “for all practical purposes, I would consider having reached the lower bound today.”
As the other three central banks, the ECB is flanking its zero rate policy with a series of extraordinary measures, once again pushing the boundaries of traditional monetary policy.
One of the hallmarks of the ECB’s initiative was a 10 basis point cut in the deposit rate to minus 0.10 percent, an experiment only attempted by Sweden’s Riksbank and Denmark’s Nationalbanken.
The ECB also cut the rate on its marginal lending facility, used by banks to obtain funds on an overnight basis as a last resort, by 35 basis points to 0.40 percent.
In addition to the 10 basis point cut its refinancing rate – a move that is more symbolic that economically important – the ECB is also launching a 400 billion euro Targeted Longer-Term Refinancing Operations (TLTRO) program with the specific aim of getting the funds to Europe’s households and non-financial businesses.
Unlike the BOE, which launched its Funding For Lending Scheme (FLS) in July 2012, a forerunner for TLTRO, the ECB’s lending scheme specifically prohibits borrowers from using the 4-year, fixed rate, low-cost loans for home purchases.
At his press conference, Draghi explained that he wants to be sure that the low interest rates offered by the ECB under TLTRO actually make it into the economy and not just money markets. “We want to make sure that this feeds into the bank lending channel because our economy is 80 percent based on banks,” said Draghi,
