By Angelos Anastasiou
IN AN unprecedented move, the European Central Bank cut its main interest rate by ten basis points on Thursday to a record low 0.15 per cent in an attempt to spur liquidity and inflation, with economists in Cyprus saying they do not see any real benefit to local banks.
The decision, expected by commentators to have comparable impact with ECB chief Mario Draghi’s 2012 “whatever it takes” speech, was accompanied by a negative deposit rate for banks of -0.1 per cent, meaning banks would effectively be penalised for parking money with the ECB.
The bank has battled with decreasing inflation in the Eurozone, currently at 0.5 per cent, which it wants to raise close to 2 per cent in order to maintain price stability. Scarce liquidity in the Eurozone was also in the ECB’s crosshairs, which is why it also announced a €400bn financing package in the form of low-interest long-term loans to banks at a fixed interest rate.
The bank is also considering a form of quantitative easing, which essentially entails creating a wall of money big enough to fend off deflation risks and recessionary pressures, and boost liquidity.
“This was an historic decision,” said Theodore Panayiotou, head of the Cyprus International Institute of Management. “It was more or less an expected decision, but its sheer boldness is unprecedented.”
Deflationary risks translated into reduced demand, no appetite for investment and anaemic growth, he said.
“Monetary expansion will help banks refinance, and it is hoped that that will in turn help lower interest rates and make more credit available by commercial banks,” Panayiotou said.
Europe’s big challenge is restoring its competitiveness with the U.S. economy and this decision brings it a step closer to achieving that, according to Panayiotou.
But caution was also advised as the ECB decision could be seen as necessary but not sufficient in itself.
“This is something that needed to be done, but we shouldn’t expect enormous results in the short term,” Panayiotou said. “To a large extent, this decision was anticipated, and the markets had already taken note of this expectation and adjusted accordingly. So, there will be some positive impact, but not as much as one might hope for. In these circumstances, monetary policy is not enough to restore growth on its own. For that, the EU needs to invest in innovation and restore competitiveness, and these are long-term actions.”
“But overall, this is a decision that should help Europe’s south, especially,” Panayiotou concluded.
Speaking to the Cyprus News Agency, University of Cyprus economics professor and former Rector Stavros Zenios was also cautious.
“We still can’t tell how this decision will impact the Cyprus economy, because our banks need to attract capital, so this wouldn’t help,” he said, adding that the ECB measure is aimed at banks that have liquidity but are not funnelling it to the market.
According to Zenios, this measure is likely to impact the Eurozone through higher inflation, which would reduce debt.
With regard to a programme the ECB said it is starting “preparatory work” on – buying asset-back securities to spur growth – Zenios said it offers an opportunity for banks to sell loan portfolios, thus clearing their balance sheets and reintroducing liquidity to the real economy.
“This is where we need to clear up our legal framework on foreclosures so that asset-backed securities have value,” he said, adding that “when the legal framework does not guarantee that an asset can be reclaimed, then the security is worthless.”
