The ECB's toolbox

It's as if the European Central Bank has ploughed through its toolbox and come out with a
bunch of policies. But, are any of them significant enough to defeat the spectre of deflation?
The most eye-catching rate cut was taking the deposit rate into negative territory for the first
time. It now costs commercial banks -0.1% to deposit money with the ECB.
However, since only about 29bn euros are deposited with the central bank, how much impact
could even deterring all of the deposits make to increasing the money circulating in the
economy? Cutting the main interest rate to 0.15% will also help, but for banks making loans
cutting rates by 0.1% isn't likely to be a major factor.
Second, the ECB is also doing a small bit of quantitative easing - printing cash to buy bonds.
Under the Securities Markets Programme, it had bought some Irish, Greek, Italian, Spanish
and Portuguese government bonds during the height of the euro crisis to stabilise bond
markets. But, it had sterilised them, meaning that the ECB withdrew the equivalent amount of
cash from the economy so it wasn't QE and wouldn't offend those who think that it crosses
the line into monetising government debt.
The ECB now won't sterilise so it's the equivalent of injecting 165bn euros of cash. It's a
quietly radical move for the central bank amidst today's flurry of announcements. It also
paves a small step towards fully fledged QE.
The biggest cash injection is again via banks. The ECB will make cheap bank loans available,
including a new facility that will target loans to the real economy called Targeted LTRO. The
latter will offer up to an estimated 400bn euros of cash to banks that is aimed at getting credit
into the real economy. This is similar to the Bank of England's Funding for Lending scheme.
In terms of total cash that's being injected, it's not negligible but also not exactly massive.
This is why ECB president Mario Draghi says that there is still more to come. Buying assets -
asset-backed securities - is being discussed as is leaving the door open to QE.
The euro has already regained the ground that it lost within hours of the new measures being
announced. It's a sign that markets doubt the scale of the ECB's monetary easing is enough to
be effective to counteract deflation. If not, then QE may well be next.