E.C.B.’s Bold Stimulus Takes Aim at Eurozone Economy

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Mario Draghi, president of the European Central Bank, unveiled a plan to head off the threat of a decline in prices known as deflation and encourage banks to lend money.CreditCreditKai Pfaffenbach/Reuters

FRANKFURT — Faced with a eurozone economy stubbornly resistant to revival, the European Central Bank on Thursday went where no central bank — at least no major one — had gone before.

It said it would effectively pay commercial banks money to borrow central bank funds.

The offer, one of a half-dozen measures the central bank announced on Thursday, means banks that participate would pay back less at the end of the four-year loan than they borrowed. It’s the same as if your bank offered you a no-interest loan, plus a free toaster as a bonus.

Banks will qualify for the money only if they lend it on to consumers and businesses. And there are other conditions. The money cannot be used for mortgages, for example.

The step represented a significant escalation of the E.C.B.’s efforts to get banks to lend more money, apply a jolt to the eurozone economy and head off the threat of a destructive decline in prices known as deflation.

The barrage of other measures included an increase in the purchases of government bonds and other assets. The purchases will rise to 80 billion euros, or about $88 billion, a month, up from the current level of €60 billion. In another unprecedented step for the eurozone, the central bank will begin buying corporate bonds as part of the monthly asset purchases.

The spending is meant to pump more money into the laggardly eurozone economy.

The central bank also cut its benchmark interest rate, the main refinancing rate, to zero, from 0.05 percent.

And it lowered its deposit rate — the interest commercial banks receive for their holdings at the E.C.B. — to minus 0.4 percent, from minus 0.3 percent. By charging banks more to keep deposits at the central bank and less to borrow from it, Mario Draghi, the E.C.B. president, and his colleagues hope to make it less attractive for commercial banks to hoard cash.

Whether the broad and even radical set of measures will have an effect, only time can tell. But their sheer scope underscores the challenges that Mr. Draghi is up against in trying to formulate monetary policy with so many forces working against sustained economic growth in Europe.

Those negative forces include a drop in demand for eurozone exports from emerging countries like China, unstable financial markets, and a decline in confidence among consumers and business managers.

Together, those drags on the economy of the 19-country eurozone are a reason the bloc’s unemployment rate is more than double that of the United States, and why eurozone growth has lagged the American rebound in recent years.

Mr. Draghi on Thursday noted widespread criticism that central banks had become powerless in the face of economic trends. “The best answer to this is being given by our decisions today,” Mr. Draghi said. “We have shown that we are not short of ammunition.”

But the unexpected sweep of Thursday’s announced steps was also seen as a sign that the E.C.B. was more worried than analysts thought about the risk of deflation.

“This has all the hallmarks of the E.C.B. having thrown the kitchen sink at the problem,” Patrick O’Donnell, an investment manager at Aberdeen Asset Management, said in a statement.

Experts said that paying banks to lend has never been tried by one of the world’s major central banks. In theory, Sweden has such a rate, but banks there have not taken advantage of it because they already have more funds than anyone wants to borrow.

The whiff of desperation in Thursday’s moves helped explain why stocks gave up initial gains after Mr. Draghi’s remarks. And the euro rose against the dollar — a potential drag on eurozone exports — after he said that rates would not be cut further.

In normal times, commercial banks earn interest on money parked at the central bank, and pay money to borrow. That convention will now be reversed, at least in some cases.

The new approach, being paid to lend, will apply to a special program that allows banks to borrow money for four years, provided they lend the money on to consumers and businesses.

Initially banks will pay zero percent interest, the new main benchmark rate. But if the commercial banks meet certain criteria, they will get a bonus of 0.4 percent annually on the value of the loan after two years, applied retroactively.

Theoretically, banks would be able to refinance up to 30 percent of their loan books under this new arrangement.

One of the eurozone’s enduring problems is a dangerously low inflation rate. Despite the bank’s stimulus measures to date, inflation in the 19 countries of the eurozone has been stuck near or below zero for more than a year.

The inflation rate, which had been slightly positive, was minus 0.2 percent in February, according to official figures.

Falling prices are a symptom of slow growth. They also hurt borrowers, whose loan payments become more onerous if there is no inflation. Moreover, a broad, sustained decline in prices can become self-fulfilling and difficult to reverse, which is why economists fear it so much.

As recently as December, the central bank had forecast an inflation rate of 1 percent for 2016. On Thursday, Mr. Draghi said the forecast was now for 0.1 percent for this year.

The bank’s forecast calls for inflation to revive, rising to 1.3 percent next year and 1.6 percent for 2018. That would still be less than the official target of below, but close to, 2 percent.

The central bank last hit the target in 2013.

There has been considerable debate among economists about whether the central bank measures have done any good. There are also risks. For example, negative interest rates on central bank deposits could hurt bank profits even as many lenders are struggling with bad loans or other troubled assets.

The new, extraordinarily favorable terms announced Thursday on money borrowed from the central bank may help to counteract the drag on lenders’ profits, though Mr. Draghi said that was not the goal.

It was almost exactly a year ago that the E.C.B. set eurozone precedent by buying government bonds and other assets. The program, similar to one begun in the United States much earlier, has not been enough to bring eurozone growth back to where it was before the global financial crisis of 2008.

The money-printing program, known as quantitative easing, has helped keep the euro relatively weak against the dollar, despite Thursday’s upward blip in the currency. Over time, the slow slide is good for European exporters. And Mr. Draghi has argued that it has made it easier for banks to lend.

On Thursday, he defended the central bank’s stimulus efforts so far, saying that without them the eurozone would have already incurred “disastrous deflation.”

But he also called on eurozone governments, as he has often done, to do their part to stimulate the economy by taking measures to raise productivity and by making changes to improve the business environment. Those steps, he said, should include more spending on infrastructure.

Mr. Draghi also appeared to take pleasure Thursday in defying critics who said the E.C.B.’s Governing Council suffered from internal disagreements that prevented it from aggressively stimulating the economy.

As far as the measures announced Thursday were concerned, he said, “The majority in favor has been overwhelming.”


An earlier version of this article misstated when the European Central Bank began using negative interest rates on commercial banks’ deposits. It was June 2014, not last June.

A version of this article appears in print on , Section B, Page 2 of the New York edition with the headline: Bold Push by Europe’s Central Bank to Shore Up Economy. Order Reprints | Today’s Paper | Subscribe