“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” Draghi declared. “From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.” The ECB cut its main interest rates to new record lows on Thursday as they continue to move into negative territory without a clue as how to reverse the trend.
Beginning in April, the ECB will buy €80 billion euros worth of bonds each month, which is an increase from the €60 billion euros presently. Draghi will keep the stimulus program running at least until March 2017. However, while he thinks simply lower interest rates will entice people to borrow, he fails to see the other side of the coin that is spinning.
Lower rates rob savers of income, destroy pension funds, and leverage the debt to a dangerous level when the trend changes. People will not borrow or spend when they have no confidence in the future and businesses will not hire or expand. You cannot stimulate the economy with lower rates while crushing it with taxes.
It is true that the economic community was expecting a rate cut and more asset purchases of government debt. However, the ECB went further this time by saying it will start buying debt issued by companies as well as governments. While that is an improvement for corporations, whom typically have to pay back their debt unlike government, there is a dark cloud behind this statement. The debt they will buy, according to reliable sources, will be riskier debt of entities (banks) that are in trouble.
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