European Central Bank Desperate Stimulation Action

European Central Bank Desperate Stimulation Action

Today, the European Central Bank has taken the finance industry by surprise with dramatic changes to try to stimulate the European economy.

It has slashed ECB interest rates from -0.3% to -0.4% trying to stimulate the movement of money at fundamentally EU banking groups, in essence what this means is that EU banks will be charged more if they leave securities and deposits within central banks rather than having the money within their own bank and thus forcing them to lend more money into the economy at lower interest rates.

In addition, it has raised its Quantitative Easing (QE) programme by confirming it will buy back an additional €20 billion per month in bonds (fundamentally government debt), rising from €60 billion-€80 billion per month. Again, this is to stimulate the market with more liquidity in the markets.

Finally, it has also confirmed that it will now include buying corporate bond debt as well as sovereign debt (government bonds), known in the UK as gilts. The corporate bond market is where large companies borrow money from investors such as banking groups, pensions and investment funds and offer usually a fixed rate of return. For example, how do you think an airline can afford to place an order for 10 new aircraft? It usually borrows the money for example with corporate bonds knowing that it can make more money from airline passengers.

Comment

the move will put additional strain on European banks as they will make less money by being forced to lend money at lower rates or be charged 0.4% if they wish to leave assets within central banks.

The increase in the Q3 program means that Europe as a whole will have equalled the U.K.'s total QP stimulus programme of £375 billion every six months. It is quite staggering how much money indirectly is being pushed back into the economy by forcing banks to not keep reserves within central banks as they will be charged, forcing them to lend money to businesses and consumers at lower rates to "get rid of it" and then buy back both corporate debt and government debt, in the form of bonds thus releasing even more money into the economy.

This is an inflation disaster waiting to happen. This may not happen this year or next but we believe in around 10 years’ time an inflation bubble will develop. No wonder, some commentators are predicting house prices in the UK to be an average £1 million in around 15 years’ time. This is just like the 1980s when house prices doubled and in some areas travelled in a matter of 10 years.

Desperate measures by the European Central Bank in desperate times.