Close to exhausting the possibilities of action
The bank is limited in its ability to operate its traditional tool set, as the limited response in European markets demonstrates, Draghi said. The euro rose even though easing monetary policy should weaken it. The German 10-year bond yield fell to a new low, but the rest of the bonds in Europe were mixed and bank stocks fell.
The bank’s key interest rate has been negative, and its further reduction will weaken the European banks, which will have to pay more to the bank for their deposits, the surplus of their large reserves. The purchase of about 2.6 trillion euros ($ 2.9 trillion) in sovereign and private bonds in the years 2015-2018 raised the bank’s balance sheet to about 40 percent of the total euro zone GDP, a very high rate that limits the ability to make more significant purchases. “The Federal Reserve accounts for about a quarter of the US GDP.
“It will not be the famous big bazooka of Europe, but it will see that they can do something,” said Carsten Bjeski, an economist at the Dutch bank ING.
If the world economy is in the midst of another round of easing – central banks in Asia have already cut interest rates and the Federal Reserve signals that it may do so – the ECB is starting from a weaker position. The Fed’s interest rate target is positive, ranging from 2.25% to 2.50%, so its room for maneuver is much larger. In addition, the US has a deeper pool of government bonds, which gives the Fed plenty of assets to buy, if it wants to.
According to Brzezky, bolder measures by the ECB will require changes to existing laws to allow for the purchase of more government or corporate bonds, which are now only a small proportion, but the financing costs are already ultra low, and further reductions will keep inefficient companies Profitability, burdens on fertility, and blended bubbles in housing prices in places like Germany.
According to Brisky, an extreme step would be to expand the pool of available assets to include European stocks as well. The Japanese central bank is already buying shares, as is the Swiss central bank, which holds only foreign shares to weaken the strong Swiss franc that is hurting exporters.