ECB: Stimulus package instead of rate cuts – UOB

Lee Sue Ann, Economist at UOB Group, assessed the recently announced stimulus package by the ECB at its meeting last week.

Key Quotes

“First, the ECB introduced additional longer-term refinancing operations (LTROs) aimed to provide immediate liquidity support to the euro area financial system. Whilst these will act as a backstop when the need arises, they will be carried out through a fixed rate tender procedure with full allotment, with an interest rate that is equal to the average rate on the deposit facility. The LTROs will provide liquidity at favourable terms to bridge the period until the TLTRO III operation in June 2020.”

“Second, the ECB said its existing TLTROs will be made considerably more favourable by offering loans to banks below the ECB’s sub-zero deposit rate, which currently implies a rate of as low as -0.75%. This is aimed at supporting lending to those banks most affected by the COVID-19 outbreak, especially small- and medium-sized enterprises.”

“Third, the ECB will allow looser collateral conditions so more bank capital can be deployed. Collateral easing to make sure banks can take full advantage of the TLTRO III, similar to the relaxation the Bank of England (BOE) provided to banks on their countercyclical buffers.”

“Fourth, the ECB announced an additional “envelope” of EUR120bn of net asset purchases until end-2020, equivalent to EUR13.3bn in additional QE a month. This will be on top of its existing commitment to buy EUR20bn a month. This additional envelope will be focused on private-sector debt and won’t help contain moves in peripheral Europe’s sovereign curves. The ECB reaffirmed that QE under the asset purchase programme (APP) will run until just before it next intends to raise rates.”

“Lagarde also announced that Euro area GDP growth is projected to be 0.8% this year and 1.3% in 2021, down from estimates before the COVID-19 outbreak… She added that growth was expected to regain traction over the medium term, supported by favorable financing conditions, the euro area fiscal stance, and the expected resumption of global economic activity.”

“In all, whilst the ECB’s latest measures suggest its willingness to act, its ability is clearly constrained by the already-low level of interest rates and the significant stimulus previously provided, which leaves the ECB very little left as far as monetary policy ammunition is concerned… Only time can tell whether the latest measures are sufficient to support the Eurozone economy. This will also highly depend on fiscal policies”.