The headquarters of the European Central Bank in Frankfurt, Germany. Picture: EPA
The headquarters of the European Central Bank in Frankfurt, Germany. Picture: EPA

Frankfurt am Main — European Central Bank (ECB) governors agreed on Thursday to lower negative interest rates even further and resume their multibillion-euro quantitative easing (QE) programme to boost a slowing economy.

Here are the monetary policy tools the Frankfurt institution will deploy in the coming months to battle the widespread uncertainty — over US-China trade tensions, Brexit, geopolitical clashes and emerging market woes — weighing on the economic outlook.

Interest rates 

The ECB has sunk interest rates to historic lows since the twin shocks of the global financial and eurozone crises as it pursues its mandated inflation target of just below 2.0%.

On Thursday, the bank decided to push the rate it charges on banks' deposits down to -0.5% from -0.4%.

Such a move should encourage lenders to offer businesses more credit and invest in the real economy rather than hoarding cash.

Meanwhile, the ECB left untouched its main refinancing rate — the interest it charges on one-week loans to banks — at 0%.


With an eye on complaints from banks that negative rates are hurting their business model, ECB chief Mario Draghi promised six weeks ago that “if we are to lower interest rates, that will come with mitigating measures”.

Those materialised Thursday with a “two-tier system ... in which part of banks' holdings of excess liquidity will be exempt from the negative deposit facility rate.”

Sweden, Switzerland, Denmark and Japan have already adopted such a measure, slashing lenders' annual bill on excess liquidity, which for eurozone banks currently amounts to about €7.5bn — mostly paid by French and German lenders.

Cheap loans to banks

In March, Draghi said the bank would offer a third series of cheap loans between September 2019 and March 2021.

The institution gave banks the chance to borrow massive amounts at extremely favourable interest rates in schemes known as TLTRO I and II between 2014 and 2016.

The measure was another attempt to encourage lending in a sluggish economy.

Banks, especially the more fragile members of the sector in Italy, leapt at the chance for low-cost liquidity.

ECB policymakers said Thursday that, depending on how much the banks lend, they could enjoy a negative interest rate on their borrowings “as low as the average interest rate on the deposit facility prevailing” during the loan's lifetime. That would mean the central bank effectively paying the banks to borrow money.

The ECB also extended the duration of the loans from two to three years.

Mass bond-buying 

When lower interest rates alone failed to restore growth and inflation, the ECB turned to a policy of mass purchases of government and corporate bonds, known as QE.

Between March 2015 and December 2018, policymakers bought up €2.6-trillion debt, mostly at a pace of tens of billions per month.

The aim: to flush newly created money through the financial system and into the economy to stimulate growth.

Central bankers credit the scheme with helping to ward off deflation and creating millions of jobs.

Now the ECB has relaunched its bond-buying, saying purchases of €20bn per month will begin on November 1.

Observers will be keen for details as new QE could require the ECB to relax a 33% limit on the share of any one country's debt it can buy. That, in turn, could bring new legal and political challenges down on its head, risking a repeat appearance before Germany's constitutional court over allegations of “monetary financing” — or the central bank directly footing the bill for state spending — which is banned under European treaties.