ECB action raises fears of prolonged Japanese-like malaise

Europe may be entering a “Japanification” phase, where growth and inflation remain sluggish or anaemic for an extended period, a senior Irish analyst has warned in the wake of the European Central Bank’s latest action to reboot the continent’s flagging economy.

“The euro zone is a mess, rates are going nowhere fast and are likely to be stuck close to zero for a long, long time,” said economist Alan McQuaid.

“Europe is entering a ‘Japanification’ phase. Japan first pushed rates to zero in February 1999, and 20 years on, things are little changed,” he said.

Mr McQuaid was speaking after ECB president Mario Draghi announced an ambitious new stimulus package while warning euro zone governments that the central bank could not remedy the bloc’s darkening economic outlook on its own.

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Mr Draghi urged them to loosen the purse strings, saying: “Now is the time for fiscal policy to take charge.”

The ECB is the latest in a series of major central banks to switch from tightening monetary policy to loosening again in response to growing fears of a global economic slowdown, and its move piles pressure on to the US Federal Reserve, which is next week expected to cut rates for the second time in two months.

At a meeting of its governing council in Frankfurt on Thursday, the ECB cut its deposit rate from -0.4 per cent to a new record low of -0.5 per cent. The bank will also restart its quantitative easing (QE) programme, buying €20 billion of bonds every month from November. It eased lending terms for euro zone banks and offered them tiered interest rates in a bid to aid their balance sheets.

It is the first time the ECB has cut rates since March 2016; the resumption of QE revives a bond-buying programme that the ECB paused last December after buying €2.6 trillion of bonds.

Devaluing euro

US president Donald Trump responded by reiterating his complaint that the ECB was attempting to devalue the euro.

"European Central Bank acting quickly," Mr Trump tweeted. "They are trying, and succeeding, in depreciating the euro against the VERY strong dollar, hurting US exports . . . And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!"

Mr Draghi, who will finish his eight-year term as ECB president and hand over to Christine Lagarde at the end of October, responded by saying: “We have a mandate. We pursue price stability. And we don’t target exchange rates. Period.”

The ECB cut its forecast for growth in the 19-member euro zone this year by 10 basis points to 1.1 per cent, and by 20 basis points to 1.2 per cent for 2020.

“Ten years from now I wouldn’t be at all surprised to see euro zone rates much the same as they are now,” Mr McQuaid said.

"The general consensus appears to be that what is required is huge fiscal stimulus for the region. With Germany now on its knees, this will be easier to achieve, but once Europe's economy recovers, what happens then?" he said.

“If we are still looking at monetary policy as the answer, then in my opinion we can’t rule out the ECB eventually buying equities and/or charging households to hold deposits, though the latter would be a very dangerous move,” he said.

– Additional reporting by Financial Times