FLASH ECONOMICS-Euro zone:Giving banks more liquidity would be useless

kongshan

FLASH ECONOMICS-Euro zone:Giving banks more liquidity would be useless

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The euro zone still clearly faces the risk of deflation: inflation is declining, growth is weak, real interest rates are too high, credit is declining; the emerging-country crisis, the poor indicators in the United States and the decline in expected inflation increase this risk of deflation. How could the ECB respond if this risk is borne out By cutting the repo rate, switching to a negative deposit rate, stopping its sterilisation of the SMP, lowering the required reserve ratio, staging new long- or very long-term repos. The problem is that all these measures would be useless. Increasing the banks' liquidity would not boost the euro-zone economy as long as demand for credit is declining and euro-zone banks have no use for additional liquidity (which they would give back to the ECB). The only anti-deflationary weapon when credit demand is in decline is quantitative easing: instead of increasing bank liquidity, it increases the liquidity of all economic agents that sell assets to the central bank, and which use this liquidity either to buy goods or to buy assets, whose prices increase, which jump-starts demand through wealth effects.