June 6, 2014 6:08 am JST

European Central Bank aims big guns at low inflation

SHOGO AKAGAWA, Nikkei staff writer

FRANKFURT, Germany -- The European Central Bank unveiled a host of bold easing measures Thursday, aiming to tackle the triple threat of low inflation, sluggish growth and a strong euro.

     Consumer prices rose at a year-on-year pace of just 0.5% in May, a trend Austria's central bank Gov. Ewald Nowotny attributes to a lack of demand. Goods are gathering dust in southern European nations such as Greece and Cyprus as employers cut wages. Deflation has taken hold in some places, in what could be called an aftereffect of the European debt crisis.

     While the eurozone may have dragged itself out of recession, robust economic growth has proved elusive. The bloc's economy grew just 0.2% on the quarter in real terms between January and March. France clocked 0% growth, while Italy sank into negative territory.

     Speaking to reporters after the ECB meeting, President Mario Draghi noted the economy's "moderate recovery" but admitted that first-quarter growth data was "weaker than expected."

     Adding to the eurozone's challenges is the strength of the common currency. A firm euro is suppressing the prices of crude oil and other imports, fueling a vicious cycle of currency appreciation and low inflation.

     The ECB had expected eurozone economies to gradually recover and prices to rise as the effects of the debt crisis subsided. It had thus eschewed rate cuts since November in favor of a strategy of dampening the euro with verbal interventions. But confronted with slumping economies and prices, mainly in southern Europe, the bank changed course and embarked on additional easing measures.

     Draghi has seen a certain measure of success from monetary easing policies since taking the reins in fall 2011. Keen to avoid disappointing the markets, he has adopted a package of various economic stimulus measures this time as well. But while investors did sell off euros on the news, it is far from clear how effective the policies will prove.

     Take for instance the bank's bold move to slash the deposit rate to minus 0.1% -- effectively charging banks to park their funds with it overnight. This is envisioned as a way to prompt financial institutions to be more proactive in lending to businesses. But many of the banks that entrust funds to the ECB are robust northern European institutions or players from outside the eurozone.

     As a senior economist at Germany's Commerzbank points out, it is unlikely that banks will suddenly send money streaming into high-risk southern Europe just because they have funds lying around. And since banks are apt to pass the higher costs imposed by the negative deposit rate on to customers, some say the move could have the undesirable effect of pushing up lending rates.

     An official at Deutsche Bank predicts the combined impact of all of these policies will be limited, forcing the ECB to take further steps in the fall. Certainly, Thursday's announcements have not quashed market expectations that the eurozone's central bank will adopt robust quantitative easing measures down the road.

     At the news conference, Draghi was careful to reiterate that the ECB still has moves at its disposal.