The only surprise in the decision by the European Central Bank (ECB) to ease monetary conditions further today was they did everything they could (at least at this point in time). That included interest rate cuts, a €400 billion injection of liquidity via a targeted long-term refinancing operation (TLTRO) and ending the sterilisation of the central bank’s earlier purchase of government debt.
The interest rate reductions have taken the
ECB into uncharted territory. Along with
a cut to the in the refinance rate to 0.15% the Governing Council also lowered
the deposit rate to -0.1%. A negative
deposit rate means banks will now pay the ECB to hold deposits at the central
bank rather than receive interest. ECB
President Mario Draghi intimated this is probably it for
interest rate reduction by stating “For all practical purposes, we have reached
the lower bound”.
As you know we have been less than optimistic about the ability of lower
interest rates to make much difference in the Euro zone. That makes the other measures more
interesting. Of those the TLTRO seems to
have the best chance of making a difference.
We know from earlier comments that Draghi found the Bank of England’s
Funding for Lending program somewhat
compelling, so it is no big surprise to see a similar program from the ECB to
encourage banks to increase lending to the private sector. There is a difference between the two however:
the ECB program excludes household mortgages.
Of course higher credit growth requires both a lender and a borrower. While credit availability will now be
improved, there needs to be sufficient willingness from the private sector to
borrow and invest. That remains to be
seen and will ultimately determine the success or otherwise of the
It is also not altogether clear whether banks will be able to invest in sovereign
debt although Draghi stated in his Q&A session that the ECB was “determined
that the TLTRO money is not spent on sovereigns”.
ECB has also decided to end the sterilisation of their earlier purchases of
government debt under the Securities Markets Program which began in 2010. The decision to end sterilisation makes it a
"delayed” quantitative easing program.
important than the small size of the program is the fact that all of today's
measures were endorsed unanimously by the Governing Council, which includes the
Bundesbank. That seems to open the door
a little wider to full scale quantitative easing should it be required further
down the track. It always seemed to me
the support (or lack thereof) from the Bundesbank would be a major hurdle for
the Governing Council has undertaken to progress the work required in
preparation for outright purchases of asset backed securities. This is a clear signal to the market the ECB
is prepped to do more should it be required.
will any of this make a difference? The
fundamental problem in the euro zone is economic growth is insufficiently
robust to make any serious dent in the significant degree of spare capacity
that exists across the euro area.
Today's measures are a step in the right direction in avoiding outright
deflation, but seem unlikely to change the outlook from one of subpar growth
and below target inflation into the foreseeable future. A more comprehensive quantitative esaing program remains more than likely. But there is, after all, only so much monetary
policy can do.