ecb sep rate decision review
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The ECB headquarters in Frankfut.
The ECB headquarters in Frankfut.

- Deposit Rate Cut 10bps To -0.50pct

- QE Restarts At EUR 20 bln/month On Nov 1

- Bank Implements Two-tier Interest Rate For Deposits

- ECB Ditches Calendar-based Forward Guidance

- Draghi Calls On Member States To Do Their Part

- Staff Lowers Growth, Inflation Projections

Frankfurt, 12 Sep (LS NEWS) – The European Central Bank has unveiled a broad monetary stimulus package designed to kick-start the Eurozone economy, but a number of the measures fell short of market expectations as the bank’s president ramped up his calls for member nations to implement fiscal steps that will help revive growth.


The EUR/USD and the German and French 10-year bond yields fell sharply on the news, but all bounced back during the press conference with ECB President Mario Draghi.


As expected, the ECB cut its overnight deposit rate by 10 basis points to -0.50pct and held the headline refinancing rate at 0pct.


The bank also said it will restart net asset purchases on 1 November and “expects them to run for as long as necessary” and end shortly before it starts raising key interest rates.  


There was some doubt about whether the bank’s governing council would agree to a new round of quantitative easing as a number of centrist Eurozone central bankers had expressed concerns about further securities purchases.


Draghi said there was “broad agreement” for the package, so much so that the governing council didn’t even need to vote on its passage. He called the package “quite powerful” and then later said it was “adequate”.


Other measures in Thursday’s announcement included better terms for long-term loans to banks—TLRTOs—and “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 also said it would extend its reinvestment of the principal of maturing securities in full past the first rate hike, “and in any case for as long as necessary.”  


Draghi said there is no more “calendar dependence” in the bank’s forward guidance. Instead of announcing end-dates for policies, rate-setters will instead monitor inflation and other key economic indicators factors before changing tack.


Headline inflation in the Eurozone was 1pct in August, quite distant from the ECB target of near but below 2pct.  


At the moment, it’s all about the data, which underpinned the need for the monetary stimulus package. Draghi said, “There were three elements behind the decision: a protracted slowdown in the economy, the persistence of downside risks in global trade, [and] the downward revision in inflation projections.”


The ECB’s latest staff projections for growth and inflation for the current year through 2021 were reduced virtually across the board, with the bank’s president noting the forecasts fail to factor in a hard Brexit or the latest international trade tensions.


“We still think that the probability of a recession in the euro area is small, but it has gone up,” Draghi said.

A ‘Mixed Bag’


Christoph Rieger, head of rates and credit research at Commerzbank called the package “a mixed bag,” noting that the rate cut and size of the new asset purchases programme were below some expectations, but open-ended QE and more generous TLTROs were “positives.”


ING Chief German Economist said, “This is Mario Draghi’s final ‘whatever it takes’.” Draghi is scheduled to chair his last governing council meeting next month before former IMF President Christine Lagarde succeeds him on 1 November.


Just over seven years ago, Draghi famously said the ECB “is ready to do whatever it takes to preserve the euro.” Brzeski noted that the phrase can now be expanded to include “as long as it takes.”


The market had been warned: The bank announced a shift to an easing bias in July after its last rate decision, when Draghi said policymakers were considering a broad range of measures to improve the state of the Eurozone economy.


Draghi noted that in the past he had always maintained that all instruments were ready for use. “Today we did it.”


Further loosening seems unlikely anytime soon. One analyst told Bloomberg TV that the market will interpret Draghi’s comments on Thursday as him saying, “We’re pretty much done.”

Waiting For Member States To Say ‘Hold My Beer’


Some observers questioned the effectiveness of the latest package. “The marginal benefits of cutting already-negative rates are limited at best, even if the move has been accompanied by more generous long-term refinancing operations (TLTROs) and a tiering of deposit rates,” said Shweta Singh, managing director for global macro at TS Lombard. “The key risk is that rate cuts could even backfire.”


Andrew Kenningham, chief Europe Economist at Capital Economics, said: “On first glance this looks like a pretty dovish package. It remains doubtful, however, that this will do much to reboot the Eurozone economy let alone achieve the near-2pct inflation target.”


The ECB president has long stated that euro area member states are also responsible for promoting growth, and in their case it should be through fiscal policy. He uncharacteristically underlined this assertion repeatedly during Thursday’s press conference.


ING’s Brzeski said, “For the first time in years, the language on fiscal policy in the introductory statement was changed, calling more outspokenly on governments ‘with fiscal space’ to ‘act in an effective and timely manner.’”  


The ECB can’t save the euro area on its own, Singh said, “A fiscal boost is clearly lacking in the Eurozone and the ECB continues to do the heavy lifting. But in the absence of a meaningfully expansionary fiscal policy, it is pushing on a piece of string.”

Trump Weighs In


Draghi rebuffed assertions tweeted by US President Donald Trump that ECB policymakers “are trying, and succeeding, in depreciating the euro against the very strong dollar.”


“We have a mandate,” Draghi said. “We pursue price stability. We don’t target exchange rates. Period.”


-- Eric Culp

Twiter: @EricCulpLS

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