Home Central Banks ECB Rate Cut Disappoints

ECB Rate Cut Disappoints

Stockholm (Ekonamik) – At its Thursday monetary policy meeting, the ECB decided to lower its overnight deposit facility rate by 10bps to -0.5%, from -0.4%. The ECB also took a number of other steps to increase the money supply and to ensure the effectiveness of its policy decision.

Asides from the cut to the rate it charges banks for holding excess balances with national central banks overnight, the ECB also took decisions the way that its rates will be applied and related to its asset purchases. With regards to the deposit rates, the ECB introduced “a two-tier system for reserve remuneration in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.”

The ECB announced it would restart net purchases under its asset purchase programme (APP) at a monthly pace of €20 billion from 1 November. Contrarily to previous instances of this policy, this time the ECB has consciously made the decision to not put a deadline for the policy, leaving it open-ended saying that they will “run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates”. These asset purchases will include securities with yields below the deposit facility rate. The ECB also explained that the returns from these asset purchases will be reinvested in full.

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The ECB also announced changes to the interest rates applicable to the Targeted Long Term Refinancing Operations. “The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.”

Market reaction was lukewarm among Swedish banks. The cut was small and did not extend to the ECB lending facilities, while the asset purchases were not enormous. According to Erik Meyersson, Senior Economist for the Eurozone at Handelsbanken Capital Markets the ECB’s “compromised stimulus package is no ‘big bazooka'”. He added that “the announced package is unlikely to have a significant effect on our expectation inflation trajectory over the foreseeable future,” before concluding that “Market reactions were modest with the euro weakening, consistent with the somewhat curbed enthusiasm in market sentiment observed in recent days.”

Nerijus Maciulis at Swedbank Research agreed. “We think that this will have very limited impact of economic growth and inflation in euro area and will have negative side-effects. This was probably the final delivery of the current ECB president Mario Draghi and the next meaningful changes will be done by the incoming president Christine Lagarde. We forecast that the next ECB decision will be monetary policy tightening, not easing. But that won’t happen anytime soon.”




Image courtesy of ECB

Filipe Wallin Albuquerque
Filipe Wallin Albuquerque
Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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