ECB: Stimulus ramp up – Westpac

Simon Murray, analyst at Westpac, notes that the ECB has cut the deposit rate, moved to a tiered reserve system, restarted asset purchases, repriced TLTRO's, and strengthened forward guidance.

Key Quotes

“Having previously paved the way for the introduction of additional stimulus at the July meeting, the ECB’s well telegraphed announcement of new stimulus overnight largely met expectations. The stimulus package consists of five parts.”

“Firstly, the deposit rate was cut 10bps to -0.5% but no changes were made to the repo rate (0%) and MLF rate (0.25%).”

“The ECB have also moved to a tiered reserve system. For each bank, a multiple of six times minimum reserves will be exempt from the deposit rate charge and instead receive a juicy 0.0%. This moves the ECB’s negative interest rate policy more into line with the likes of Switzerland and Japan with the tiered system designed to protect policy transmission through the bank lending channel.”

“Thirdly, the ECB are restarting net asset purchases. The program will begin in November at a €20bn per month pace and will persist for as long as necessary. No changes to the composition of asset purchases were announced (currently ~80% sovereign bonds), although the ECB will now also purchase private sector securities below the deposit rate.”

“Four, the pricing of TLTRO-III (new cheap loans to the banks) has been adjusted. Previously, the incentive rate was tabled at the deposit rate +10bps but now does not include a premium. This effectively means new loans will be at least 10bps cheaper than the loans being replaced but could be lower if the deposit rate is cut again. Maturity of new loans were also extended to 3 years from 2.”

“Lastly, calendar dependence of forward guidance has been removed. Guidance is now purely state dependent, with stimulus to continue until the ECB “has seen the inflation outlook converge to a level sufficiently close to, but below 2%.”

“All up, the stimulus package broadly came in line with our own expectation. We did not anticipate the repricing of TLTRO-III but had expected a larger €40bn per month asset purchase program. We continue to believe the program will be lifted to that pace in 2020 and the deposit rate will be reduced to a low of -0.7%.”