ECB's easing measures revisited

In June, the ECB announced a liquidity boost and introduced a negative deposit rate. Although it will take some time before the macro economic implications are seen, the debate about broad-based QE has already returned.

From a market perspective, the monetary easing has supported performance in peripheral markets and led to lower money market fixings, but the expected steepening of yields curves and higher break-even inflation have not been seen.

This could reflect that the potential and actual liquidity boosts remain unknown as it depends on future net lending and demand for liquidity for months ahead. However, the first net lending figures suggest a large possible amount of liquidity and continuing the trend results in a potential liquidity boost around EUR1tn.

The declining benchmark for negative net lenders means the ECB provides liquidity to banks, which need to adjust their balance sheets. Entering the TLTRO with a large negative benchmark and/or the possibility to expand lending results in the most available liquidity.

The penalties attached to the TLTROs are limited and banks can use the funding for government bond carry trades for two years. This should be positive for the willingness to take on the TLTRO, but negative for credit creation.

In this paper, we revisit the announced easing measures and their dynamics. It answers the questions ‘what’ and ‘how’ and with sterilised examples we show the prospects for banks with positive and negative net lending developments.

In four upcoming papers, we analyse the impact on money market rates, the potential for carry trades, support for activity and inflation and implications for the ECB (see Box 1). We also provide charts with ‘what to watch’ going forward.