Riittävätkö EKP:n erikoistoimet?

Thanks for joining me, Bob.

Bob Johnson: Great to be here today.

Stipp: Before we talk about the measures that were announced by the ECB, let's talk about the general economic situation in the eurozone and why these measures were perceived to be necessary.

Johnson: A couple of weeks ago we got some news on eurozone GDP, which grew 0.2% between the fourth quarter and the first quarter, and you annualize that, it's 0.8%, and that was below expectations. Certainly the U.S. is growing faster, China is growing faster. It's one of the lowest growth rates out there. So, that was a concern

And there was some fear that it had slowed even more recently. The PMI, the purchasing managers' surveys, for Europe had dropped from 54-55 in January back to the 52 level most recently. That indicator is a little bit more forward-looking. So that means things are going to be a little bit slower even.

And then the third thing that came out just two days ago, European inflation, came in at 0.5% year-over-year versus 0.7% the previous month. That 0.5% [inflation rate] is not quarter-to-quarter or month-to-month. That's May of last year compared to May of this year; they were only up 0.5% for Europe, and the target is 2%.

Stipp: What does that mean? Why is it so dangerous to have inflation so low?

Johnson: Because you start to build the deflationary expectations, and people hold off buying, thinking it's going to be cheaper tomorrow. It's harder to get rid of it. You have to do all these games--which frankly they started to do already, the negative deposit rates and all the really oddball stuff--and they really would like to avoid that. It's a lot easier to control monetary policy and economic growth when you've got at least a modest bit of inflation. But when you are in deflation, it's hard to fight your way out.

Stipp: So let's talk about some of the measures that they implemented, given that backdrop. The first was cutting a key interest rate to 0.15% from 0.25%. 0.25% was already pretty low, but they've moved it even lower.

Johnson: That's their main lending rate, and I'm surprised they haven't brought that rate down sooner. Frankly it's a little bit lower in the U.S. than what it was [in the eurozone]. Now this move brings us a little bit more in line. So that was good to see. And the emergency rate also came down a little bit more drastically from 0.7% to 0.45%.

And then the third component is … banks are paid money when they put imoney in the central bank usually, and in this case, they're going to charge banks a fee. They're actually going to make it a negative interest rate of 0.1%. The purpose there is to hope that banks will lend the money out rather than having a little bit of it confiscated every year.

Stipp: Do you think that's going to work?

Johnson: I think it could work, although you've got to keep in mind, we are telling the banks to be more cautious with the new Basel III regulations and saying we don't want a repeat of all the old stuff, and yet by doing this, you're certainly going to encourage them to take some riskier loans…

Stipp: So you want them to loosen the purse strings a little bit, but not too much.

Johnson: Hopefully not too much.

Stipp: You mentioned that you were surprised some of these rates didn't move sooner, some of these actions didn't come out sooner. Why didn't they? They've been talking about how they're ready to take action--they finally did take some action. Why did it take so long?

Johnson: I think they haven't probably got a lot of ammo left, at least I didn't think they did, and I think they wanted to just talk about it rather than actually implement it, and hope it had the same effect. And now they've had to put their money where their mouth is, and I think they've really had to do that for some time.

And then the Germans have objected sometimes to some of the measures. They really wanted not to take a strong an action as maybe the ECB and some of the other countries wanted to take. So that's another factor that's held things back, but I think this really, really low inflation rate probably really forced the Germans hands.

Stipp: One thing that they still have in the toolbox that they haven't deployed yet is quantitative easing. To what extent do you think that might be necessary in combination with these other measures to get the effects that they want to see on the inflation rate?

Johnson: I think the strongest statement [ECB president Mario Draghi] made … remember last year about this time … is, "we will do whatever it takes." This year, "we're not through, yet" is the motto that came out of the press conference that everybody will latch on to. So, I think there is some thought that quantitative easing--which is buying long-term bonds directly--which they've been pretty much opposed to for some time, that they're laying the groundwork to do that. They haven't actually done it.

The other thing they've done shorter-term to improve lending is that they've now got another program where the banks put up collateral, they'll lend them more money, so they can make more loans.

In Europe, banks are much more important to the overall system than they are here in the U.S.--as important as they are here. Here at least we've got a bond market you can go to. You've got a stock market you can go to. You've got an asset-backed security market that's huge. They've got one in Europe; it's a fifth the size of the U.S. market. So you just don't have a lot of alternatives other than the banks.

So certainly to stimulate the banks is important, and this program today will encourage the banks to lend more money. It's $400 billion. It's not a small program. They've tried it before, and it has helped the economy. They hope is that it does so again. And if that doesn't work, then we roll out the big guns, the QE, which is probably the thing that got people most excited.

Stipp: So these are the measures that they're taking in Europe now or may take in the future if they need to, but what is the impact potentially for the rest of the global economies?

Johnson: I think that's a great question. As you look at the total world economy, certainly by bringing rates down, they join a large crowd already, with China, Japan and the U.S. all already doing extensive measures. So, they're kind of late to join the party.

One of things it will do is bring down the euro exchange rate, and that would be good news for their exporters, but probably less good news for U.S. exporters who will now have to compete against tougher European competitors.

It's a world bond market in a way, and U.S. rates have been down over the last six months. The 10-year has been down from 3% to about 2.5% mainly because European bond rates had fallen so much because of anticipation of today's meeting. Today's meeting was not a surprise. We knew it was a June meeting and that it was coming, and the markets had largely anticipated it. Spanish debt at one point was at something like 2.8%, which wasn't very far off where the U.S. Treasury bond rate was.

So, some of that was anticipated and brought U.S. rates down, and I think we may not actually see the rates move that much from here.

Stipp: Bob, some great insights on the ECB's actions and the potential knock-on effects. Thanks for joining me today.

Johnson: Thank you.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.