European Central Bank to Expand QE, Cuts Interest Rates Further

forex_news_8The 25-member Governing Council, meeting in Frankfurt on Thursday, cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent, and its benchmark rate to zero. Bond purchases were raised to 80 billion euros ($87 billion) a month, starting in April, and corporate bonds will now be eligible. A new series of long-term loans to banks will be launched. Draghi will hold a press conference at 2:30 p.m. local time to explain the decision.

Market expectations for more stimulus had risen after the ECB said it would review its program as persistent weakness in consumer prices and a Chinese slowdown threaten to undermine the euro-area recovery. Draghi has repeatedly said policy makers are willing to do what’s necessary to revive inflation and underpin the region’s upturn.

“This is presumably an example of whatever it takes,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $378 billion in assets. “So far so good. Now let’s see if it feeds into the real economy.”

The euro was down 1.4 percent at $1.0851 at 1:57 p.m. Frankfurt time. The Stoxx Europe 600 Index jumped 2.3 percent.

The concern now is that the lower deposit rate squeezes bank profitability to the point they curb lending, impairing the transmission of the ECB’s monetary policy. Banks can’t easily pass the cost onto retail clients for fear that they’ll withdraw their savings, a crucial source of funding.
Executive Board member Benoit Coeure said in a speech on March 2 that while the ECB’s priority is price stability, it’s “well aware” of the risk that negative rates will hurt bank profitability. Vice President Vitor Constancio has said the central bank should “mitigate” the impact.

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 under QE.
The ECB said its new round of targeted refinancing operations will start in June. The central bank said the interest rate “can be as low as the interest rate on the deposit facility.”

Alessandro Speciale
Source: www.bloomberg.com


 

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