ECB turns dovish changing the forward guidance on rates and launching TLTROs 3.0

• The ECB kept the main policy rates unchanged in March.
• The ECB changed its forward guidance on rates saying the change will not materialize until the end of 2019.
• The ECB launched the new series of TLTROs starting from this September.

The ECB said the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively on Thursday, March 7. While the decision on rates was in line with market expectations, the forward guidance on rates turned more dovish.

The ECB also launched the new series of quarterly targeted longer-term refinancing operations (TLTROs-III) starting in September 2019 and ending in March 2021, each with a maturity of two years. The TLTROs will help to preserve favorable bank lending conditions and the smooth transmission of monetary policy, the ECB said.

Under TLTROs-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation and the Eurosystem’s lending operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021, each with a maturity of two years.

As the ECB President Mario Draghi later explained during the press conference, there were Governing Council members suggesting even later launch to the TLTROs starting in 2020. 

In terms of the forward guidance, The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. That changes the previous language of not touching the rates until the summer of 2019.

The initial EUR/USD market reaction was to the downside as the ECB turned more dovish with the Eurozone banking stocks falling back into negative territory as investors weigh slower interest rate rises by ECB.