The new season of expansive measures by the European Central Bank has finally begun, which has announced news both on the interest rate front and on the re-edition of quantitative easing.
DEPOSIT RATE
As expected by the market, the Frankfurt institute cut by 10 basis points, from -0,4 to -0,5%, the interest rate on deposits that the commercial banks park in the belly of the Eurotower itself.
PROTECTION FOR BANKS
At the same time, they are on their way measures to safeguard the banks from the negative effects of ultra-low rates on deposits: part of the institutions' excess liquidity will in fact be exempt from these negative rates.
REFINANCING RATE AND MARGINAL OPERATIONS
Instead they are confirmed at zero the rate on the main refinancing operations in the euro area and 0,25% on marginal transactions. The two rates will remain at this level, or lower, until inflation returns close enough to the Frankfurt target level (just below 2%).
QUANTITATIVE EASY
Not only that: the ECB has also decided to restart quantitative easing on government securities at a rate of 20 billion euros a month starting next November and "as long as necessary to strengthen the accommodative impact of rates". The conclusion will come “just before” the institution starts raising rates.
At the same time, the ECB will continue "for an extended period of time" to renew titles purchased during the first edition of Qe as they reach maturity. These operations will continue beyond the rise in interest rates "and in any case for the time necessary to maintain favorable liquidity conditions" and a largely expansive orientation.
TLTRO
The duration of the LTTROs is extended from two to three years, the modalities of which will change in order to "preserve favorable conditions for bank loans, ensure a smooth transmission of monetary policy and further support the expansive stance of monetary policy". The rates applied will be equal to the average of the reference rates, currently at zero, during the duration of the operation, and lower for the banks whose net loans will exceed a reference level.
THE REACTION OF THE EURO
Following the announcement of these measures by the ECB, the euro it records a sharp drop below the 1,10 level, at 1,0974 dollars.
“CONTINUED WEAKNESS OF THE EUROZONE ECONOMY”
Today's decisions by the ECB were taken "in the light" of the delay in reaching the targets for rising inflation, while "the forecasts indicate a more protracted weakness of the economy and subdued inflationary pressures". This was stated by the president of the ECB, Mario Draghi, in the press conference at the end of the Governing Council.
“In the Governing Council there was unanimity on the urgency to act – he added – There was broad consensus on the cut in deposits and on the measures concerning forward guidance and LTTRO. On the other hand, there was greater divergence of views on the recovery of net purchases but there was no need to go to the vote”.
"NOW IT'S THE TAX POLICY"
Draghi underlined how all the members of the Council are instead in agreement on the fact that fiscal policy must now become the first tool, while the recovery of the economy in recent years, which has led to the creation of 11 million jobs, it was largely the result of monetary policy.
FURIOUS TRUMP
Donald Trump's reaction on Twitter was not long in coming: “The European Central Bank, acting quickly, cuts rates by ten basis points. They are trying, successfully, to devalue a lot against a very strong dollar, hurting US exports. And the Fed sits and sits and sits. They are paid to lend money, while we pay the interest”.
Draghi's response arrived shortly: “At the ECB we have a task: to keep prices under control. We do not act to change the exchange rate."
