"Who has the key for the toolbox lock?"                                          Photographer: Jasper Juinen/Bloomberg
"Who has the key for the toolbox lock?"                                          Photographer: Jasper Juinen/Bloomberg

Figures today showing that inflation in the euro area slowed to 0.5 percent in April all but guarantee that the European Central Bank will be reaching into unplumbed corners of the monetary-policy toolbox when it announces the results of its rate-setting meeting on Thursday. The one innovation it will almost definitely implement -- negative interest rates on cash left with the central bank -- will do little to goose lending.

Less Than Zero

The theory is simple enough; charging financial institutions for the privilege of keeping money on deposit with the central bank will spur them to do something more economically productive with their reserves, such as lending them to companies. But, as the chart below shows, Europe's banks only have about 29 billion euros ($39 billion) with the ECB's deposit facility, a far cry from the 771 billion euros hiding from the risk of a meltdown in the government bond market in the dark days of mid-2012:

Even if all 29 billion euros suddenly ran into the economy shouting "borrow me, borrow me!," that's won't be enough to stimulate lending and growth. Here's another chart showing how the supply of credit in the euro area has collapsed, based on the loans component of the money-supply data:

Inflation was even slower than the 0.6 percent predicted by 38 economists in a Bloomberg News survey, and down from 0.7 percent in March. After pledging action to avert deflation at last month's press conference, ECB President Mario Draghi will need to come up with something special this week -- another long-term lending facility for banks, perhaps, or some concrete plans to unleash his long-promised bond-buying program -- to prevent his promises from sounding increasingly empty.

To contact the author of this article: Mark Gilbert at magilbert@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net