Monetary Policy April 2020

ECB cuts rates on long-term liquidity operations and introduces new anti-pandemic auctions

On 30 April, the European Central Bank (ECB) decided to step up its efforts to combat the economic and financial shockwaves currently shaking the Euro area. The ECB further lowered the rates on long-term liquidity auctions and announced seven additional refinancing operations, as part of efforts to support liquidity conditions and preserve the smooth functioning of money markets.

The ECB further lowered the rates on targeted longer-term refinancing operations (TLTROs), setting them 50 basis points lower than the average reference rate for the period on the main refinancing operations between June 2020 and June 2021. As the average reference rate is currently hovering around zero, it means the ECB will offer liquidity at negative rates. Additionally, for those banks whose volume of loans will exceed a certain threshold, the rate will be even lower, as the monetary authority set it at 50 basis points below the deposit rate—currently at minus 0.50%. Furthermore, the Bank announced a new series of seven non-targeted pandemic emergency longer-term refinancing operations (PELTROs), at a slightly higher rate of 25 basis points below the average reference rate. These auctions will be conducted starting from May until between July and September 2021, and will act as a backstop for liquidity.

On top of this, the lender of last resort confirmed the existing package of measures to support the monetary policy transmission mechanism. It also added it stands ready to ramp up the size of its EUR 750 billion emergency quantitative easing program (PEEP)—and will “adjust its composition, by as much as necessary and for as long as needed”.

The deployment of further firepower is an attempt to respond to a situation of unprecedented economic collapse in the Euro Area: GDP fell at the sharpest pace on record in Q1, labor markets are deteriorating dramatically, while consumer and business confidence is in freefall. Moreover, inflation dropped to an almost four-year low in April on the back of plunging energy prices and is expected to decline further over the coming months, prompting the Bank to affirm “it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

The regional economy is set to suffer further economic damages from lockdowns. The duration and intensity of the impact will now depend on the length and scope of containment measures adopted by member states, the spillovers on demand plans and supply chains, as well as on the fiscal response. With regards to the latter, President Christine Lagarde again urged member states to adopt a coordinated fiscal response to the crisis. Liquidity operations will grant enough liquidity on demand, but no end of the tunnel will be in sight until lockdown measures remain in place.

Commenting on the latest ECB decision, Carsten Brzeski, chief Germany economist at ING, noted:

“Lagarde is still trying to find her own fully convincing ‘whatever it takes’ moment. Today’s decisions and explanations were all comprehensible but not breathtaking. To give some credit, in the current situation and in the next phase when the eurozone economy enters the recovery, the ECB will not be in the driver’s seat, fiscal policy will have to do the heavy work. The ECB can only provide financing power for governments and companies.”

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