Eurozone Monetary Policy


Eurozone: ECB takes comprehensive action to prop up the Eurozone economy

June 6, 2014

At its latest meeting on 6 June, the European Central Bank (ECB) introduced radical measures that included, among others, moving a key interest rate into negative territory and providing more long-term cheap loans for European banks. The Bank’s goal is, “to provide additional monetary policy accommodation and to support lending to the real economy.” With this initiative, the ECB is aiming to fight low inflation, which is sapping growth and threatening to cripple the incipient Eurozone recovery.

The first set of measures involves the ECB’s main policy rates. The ECB cut the main refinancing rate by 10 basis points to the current 0.15%, which marks a new record low for the region’s policy rate. Moreover, the ECB cut the deposit rate—the rate banks receive for parking funds at the ECB—from zero to minus 0.10%, making it the first major central bank to move interest rates into negative territory ever. With a negative deposit rate, the ECB hopes to stimulate lending by making it costly for banks to hold deposits at the ECB. The ECB also cut the marginal lending rate by 35 basis points to the current 0.40%.

Next to the rate cuts, the ECB announced a series of cheap long-term loans for banks under a scheme called Targeted Long-Term Refinancing Operations (TLTRO). TRTLOs will be conducted in September and December of this year and then on a quarterly basis until June 2016. All loans that are part of the scheme will mature in September 2018. Banks will initially be able to borrow up to EUR 400 billion and future operations will be sized according to a bank’s ability to provide loans to companies. In fact, banks participating in the scheme will be required to devolve the borrowed funds if their net lending to households and businesses does not reach a specified benchmark. The price of these loans will be very cheap as lenders will pay an interest rate of just 0.1 percentage points above the prevailing ECB refinancing rate at the time of the loan.

The ECB announced that the TLTRO scheme would include, “provisions […] to ensure that the funds support the real economy,” and avoid banks steering the additional liquidity into safe government bonds rather than lending to businesses; however, details on these provisions have not been yet unveiled.

Finally, the ECB announced that it is taking the first steps toward large-scale asset purchases—an unconventional tool that all major central banks except the ECB have used since the beginning of the crisis. ECB President Mario Draghi stated that the ECB has intensified “preparatory work related to outright purchases” of asset-backed securities (ABS).

In the statement accompanying its decision, the ECB reiterated the forward guidance provided in previous meetings, stating that, “key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.” The phrasing of the statement suggests that the ECB is excluding cutting interest rates further in the near future—in previous meetings the ECB referred to keeping interest rates at “present or lower levels”. Draghi confirmed this, stating at the press conference that followed the meeting that the ECB has, “reached the lower bound.”

In taking these measures, the ECB delivered on expectations for relevant policy action which it had raised in previous meetings. That said, whether or not the measures will be effective remains to be seen. According to Carsten Brzeski, Chief Economist at ING-Diba:

“[The] package of policy measures is a strong one, underlining the ECB’s determination and willingness to act. However, as so often during the euro crisis, first-glance-enthusiasm doesn’t always last. Looking somewhat critically at today’s measures, the ECB has no guarantee that the economy and lending to the private sector can really be kick-started.”

Moreover, while it is likely that the ECB will refrain from action in the coming months, Draghi left the door open to further measures should a deterioration in the inflation outlook make this necessary. As Draghi stated in the press conference: “If need be, within our mandate, we aren't finished here.” On the timing of the ECB’s next steps, Nick Matthews, Senior European Economist at Nomura, states:

“In our view, the ECB delivered as much as possible at this stage without resorting to a broad-based asset purchase programme, confirming the sequencing approach to policy we have long expected from the ECB […]. However, the door has been kept firmly open to large-scale asset purchases as a possible response, should the situation demand it. […] That said, with Mr Draghi talking about the package of measures being a very significant response and referencing some of the time lags involved in some of these measures announced (e.g., three to four quarters for real economy effects from the TLTRO), this does not suggest there is a rush currently to get to a broad-based asset purchase programme.”

Within this setting, FocusEconomics panelists expect the policy rate to end 2014 at 0.14% and 2015 at 0.23%.

Author:, Head of Data Solutions

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Eurozone Monetary Policy Chart

Euro Monetary Policy June 2014 2

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).

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