Thursday, March 10, 2016

ECB cuts refi to zero, deposit rate by 10 bps, expands QE

    The European Central Bank (ECB) cut its key interest rates, including the benchmark refinancing rate, while it also expanded by 20 billion euros a month and widened its asset purchase program to include euro-denominated bonds by non-bank companies.
    In a statement issued prior to a press conference by its president, Mario Draghi, the ECB said its governing council had decided to cut the benchmark refinancing rate by 5 basis points to 0.0 percent, cut the deposit rate by a further 10 basis points to minus 0.40 percent and the rate on its marginal lending facility by 5 points to 0.25 percent, with all the new rates taking effect March 16.
    The ECB's monthly asset purchase program, known as quantitative easing, will be expanded to 80 billion euros a month starting in April from the current schedule of 60 billion a month.
    The ECB's new offensive against the threat of deflation is more aggressive than expected by financial markets and comes after the ECB at its previous meeting in January raised the prospect of further easing in connection with the publication of its new economic forecasts.
    Since then, the prospects for higher inflation in the euro zone have dimmed, with news that headline inflation fell to minus 0.2 percent in February from 0.3 percent in December and core inflation, which excludes energy, food, alcohol and tobacco, eased to 0.7 percent from 1.0 percent.
   In December last year the ECB cut its deposit rate by 10 basis points to minus 0.30 percent and extended its asset purchases by six months to the end of March 2017 or even beyond if necessary to ensure that inflation heads towards the central bank's target of below, but close to 2 percent.
    The asset purchase program was also widened in scope to include investment grade bonds in euros issued by non-bank companies based in the euro area.
    The final part of the ECB's aggressive new easing comprises a new series of longer-term refinancing programs, named TLTRO II. Four new lending operations, each with a maturity of four years, will be launched, starting in June, with rates as low as the ECB's deposit rate.
    In response to the ECB's rate cut, the euro fell to 0.92 to the U.S. dollar from 0.91 to be practically unchanged since the start of the year. Compared with the start of 2015, the euro has depreciated by just under 10 percent against the dollar.
    In its December forecast, the ECB lowered its outlook for 2016 inflation to 1.0 percent from its previous forecast of 1.1 percent, and the 2017 forecast was cut to 1.6 percent from 1.7 percent.
    The forecast for growth in 2016 was unchanged at 1.7 percent while the 2017 forecast was raised to 1.9 percent from 1.8 percent.
     Gross Domestic Product in the 19-nation euro area grew by 0.3 percent in the fourth quarter of last year from the third quarter for annual growth of 1.6 percent, the same as in the previous two quarters.

    The European Central Bank issued the following statement:
"At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.
(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016. 
(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016. 
(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April. 
(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.
(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."


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