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ECB’s stimulus package may not revive economic activity 

March 22, 2016

Nandini Rao, Global Risk Insights

The European Central Bank has increased its stimulus package, but this may not be enough to increase growth and bring inflation back under control.

“The ECB is ready to do its part” said its President – Mario Draghi – in a speech on 15th February. On March 10th, the Bank did just that and took steps to ramp up its stimulus in the common currency area. Monetary easing was already underway in the Eurozone. In June 2014, the ECB became the first major central bank to push its deposit rate below zero.

The ECB announced a further cut to the deposit rate, bringing the rate down to -0.4%. Furthermore, it also reduced other interest rates and increased the size and scope of its quantitative easing (QE) program by announcing that it would start to purchase certain investment-grade corporate bonds.

In a conference call after the decision had been announced, Mr Draghi stated that the objectives of the new measures were to “reinforce the momentum of the euro area’s economic recovery” and to help inflation return to its target of close to, but below 2%. Inflation is currently negative in the Eurozone. In February, the headline inflation measure was -0.2%.

This reading may be partly due to low oil prices, but core inflation – which excludes food and energy products – was a mere 0.8% and well below the ECB’s target. This measure of inflation is preferred by policymakers who believe it is a better indicator of long-term inflation. Read more

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