ECB ready to cut rates and push banks into lending to boost euro zone economy

(Reuters) – The European Central Bank is poised to impose negative interest rates on its overnight depositors, seeking to cajole banks into lending instead and to prevent the euro zone falling into Japan-like deflation.

At its meeting on Thursday, ECB policymakers may also launch a loan program for banks with strings attached to make sure the money actually gets out into the euro zone economy.

It will be the first of the “Big Four” central banks – ECB, Bank of England, Bank of Japan and U.S. Federal Reserve – to go the negative interest rate route, essentially charging banks to deposit with it.

“Consensus for action is high so there is a … risk the ECB under-delivers relative to the market’s lofty expectations,” said Andrew Bosomworth, a senior portfolio manager at bond fund Pimco in Munich.

Since ECB President Mario Draghi last month signaled the Governing Council’s readiness to act in June, policymakers have come out in force to discuss the ECB’s toolbox, feeding expectations that a broader stimulus package is in the making.

QE-BAZOOKA ON THE SHELF

Before taking any decision, the Governing Council will look at the June update of its quarterly staff projections. In March, they showed it would take 2-1/2 years for inflation to get near the ECB’s target of below but close to 2 percent.

A deteriorating outlook is seen triggering action.

A move to deploy so-called quantitative easing (QE) – money-printing to buy assets – remains some way off.

“We expect the big QE-bazooka to remain in the closet,” said ING economist Carsten Brzeski.

Full article: ECB ready to cut rates and push banks into lending to boost euro zone economy (Reuters)

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