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ECB takes bold steps to stimulate eurozone economy

European Central Bank president Mario Draghi addressed reporters at the ECB headquarters in Frankfurt on Thursday.Kai Pfaffenbach/Reuters

FRANKFURT — Faced with a eurozone economy stubbornly resistant to revival, the European Central Bank on Thursday went where no central bank — at least no major one — had gone before.

It said it would effectively pay commercial banks money to borrow central bank funds.

The offer, one of a half-dozen measures the central bank announced Thursday, means banks that participate would pay back less at the end of the four-year loan than they borrowed. It’s the same as if your bank offered you a no-interest loan, plus a free toaster as a bonus.

Banks will qualify for the money only if they lend it on to consumers and businesses. And there are other conditions. The money cannot be used for mortgages, for example.

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The step represented a significant escalation of the ECB’s efforts to get banks to lend more money, apply a jolt to the eurozone economy, and head off the threat of a destructive decline in prices known as deflation.

The barrage of other measures included an increase in the purchases of government bonds and other assets. The purchases will rise to 80 billion euros, or about $88 billion, a month, up from the current level of 60 billion euros. In another unprecedented step for the eurozone, the central bank will begin buying corporate bonds as part of the monthly asset purchases.

The spending is meant to pump more money into the laggardly eurozone economy.

The central bank also cut its benchmark interest rate, the main refinancing rate, to zero, from 0.05 percent.

And it lowered its deposit rate — the interest commercial banks receive for their holdings at the ECB — to minus 0.4 percent, from minus 0.3 percent. By charging banks more to keep deposits at the central bank and less to borrow from it, Mario Draghi, the ECB president, and his colleagues hope to make it less attractive for commercial banks to hoard cash.

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Whether the broad and even radical set of measures will have an effect, only time can tell. But their sheer scope underscores the challenges that Draghi is up against in trying to formulate monetary policy with so many forces working against sustained economic growth in Europe.

Those negative forces include a drop in demand for eurozone exports from emerging countries like China, unstable financial markets, and a decline in confidence among consumers and business managers.

Together, those drags on the economy of the 19-country eurozone are a reason the bloc’s unemployment rate is more than double that of the United States, and why eurozone growth has lagged the US rebound in recent years.

The whiff of desperation in Thursday’s moves helped explain why stocks gave up initial gains after Draghi’s remarks. And the euro rose against the dollar — a potential drag on eurozone exports — after he said that rates would not be cut further.

In normal times, commercial banks earn interest on money parked at the central bank, and pay money to borrow. That convention will now be reversed, at least in some cases.

The new approach, being paid to lend, will apply to a special program that allows banks to borrow money for four years, provided they lend the money on to consumers and businesses.

Initially banks will pay zero percent interest, the new main benchmark rate. But if the commercial banks meet certain criteria, they will get a bonus of 0.4 percent annually on the value of the loan after two years, applied retroactively.

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Theoretically, banks would be able to refinance up to 30 percent of their loan books under this new arrangement.

There has been considerable debate among economists about whether the central bank measures have done any good. There are also risks. For example, negative interest rates on central bank deposits could hurt bank profits even as many lenders are struggling with bad loans or other troubled assets.

The new, extraordinarily favorable terms announced Thursday on money borrowed from the central bank may help to counteract the drag on lenders’ profits, though Draghi said that was not the goal.