ECB raises penalty interest rates and restarts bond-buying programme

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Going forward, banks will have to pay 0.5 percent interest if they store money at the central bank. The ECB is also resuming its controversial bond- buying programme.

The European Central Bank (ECB) has raised penalty interest rates for banks and is resuming its controversial bond purchases. Instead of 0.4 percent, banks would in future have to pay 0.5 percent interest if they stored money at the central bank, the ECB announced. The Council of the ECB also agreed to invest 20 billion euros per month in government bonds from 1 November.

The central bank is thus further escalating its loose monetary policy at the end of the term of office of ECB President Mario Draghi. The key interest rate, which has been at a low of zero percent since March 2016, remains unchanged at this level.

By increasing the penalty interest rate, the ECB wants to get the banks to give more money in the form of loans to companies and consumers in order to support the economy. This is also intended to boost inflation. In order to relieve the banks somewhat, the ECB is introducing a staggered interest rate for certain allowances.

At the end of December, the ECB had for the time being terminated its programme to buy government and corporate bonds. Money from maturing securities will, however, be reinvested. From March 2015 to the end of 2018, the ECB bought bonds worth around EUR 2.6 trillion.

ECB far away from inflation target

The purchase of government bonds helps the euro states to obtain money more cheaply. Because if the ECB buys up large portfolios, they do not have to offer such high interest rates for their securities.

In all probability, the ECB will continue Draghi’s controversial monetary policy in the future. His designated successor at the top of the ECB, the Frenchwoman Christine Lagarde, has already made it clear that for the foreseeable future she considers a very loose monetary policy necessary .

The ECB is aiming for an inflation rate of just under 2.0 percent in the euro zone in the medium term. That is far enough away from the zero mark. After all, permanently low prices are seen as a risk to the economy. Companies and consumers could then postpone investments because they hope that goods will soon become even cheaper. In August, however, inflation last remained at 1.0 percent, its lowest level for more than two and a half years.

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