Last updated: June 05. 2014 11:10PM - 237 Views
By David McHugh AP Business Writer

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FRANKFURT, Germany — The European Central Bank ventured into uncharted territory Thursday with a raft of unusual measures meant to revive the eurozone economy by getting credit flowing to companies and preventing a debilitating bout of deflation.

The ECB was spurred into action by evidence that growth in the 18-country eurozone is too weak to keep consumer price inflation at a healthy level. The fear is the low inflation will last or, worse still, become an outright drop in prices that, if sustained, can snuff out what little growth Europe has.

Expectations were high for the central bank to show it would finally act to prevent such a scenario after months of hesitation in which the inflation rate kept falling. The last measure, for May, showed inflation was only 0.5 percent, far below the bank’s goal of 2 percent.

The ECB’s 24-member governing council finally struck on Thursday, announcing a package of measures that included interest rate cuts, including lowering one rate into negative territory for the first time. On top of that, it promised billions in cheap loans for banks on condition they lend more, and announced a new program to use financial markets to round up more cash for companies.

Banks are worried about low inflation, and the danger that it becomes a habit. People might start postponing purchases because they think the prices of goods will fall. That’s deflation, a trap that is hard to get out of. Japan is still struggling to get out of a deflationary trap that started in the 1990s.

Draghi says the eurozone is “strongly determined” to keep that from happening.

The ECB is aiming to get banks to loan more money at affordable rates, especially to companies in the countries, such as Spain and Portugal, which were hit hardest by the recent economic and financial crisis. Without those loans, companies can’t invest and create jobs and consumers can’t borrow to buy homes and other goods.

The ECB cut its benchmark interest rate, the rate at which it loans to banks. The rate was already at a record low of 0.25 percent, and lowering it to 0.15 percent will only help a little bit.

So the bank cut its deposit rate to minus 0.1 percent, a very unusual and untried step. In effect, banks will pay a penalty — negative interest — if they leave money at the ECB. It’s an incentive for them to lend it out instead. No one’s sure it will work.

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