Brussels, 05/06//2014 (Agence Europe) - The much-awaited meeting of the European Central Bank's Governing Council on 5 June issued a significant package of measures to relax monetary policy and encourage lending to the real economy.
The measures drawn up by the ECB are three-pronged, explained ECB President Mario Draghi. Firstly a relaxing of monetary policy, secondly an improvement in lending on to the real economy and thirdly stating willingness to use unconventional measures if necessary.
The governors of the central banks in the eurosystem decided to reduce the ECB's main interest rates as from 11 June. The main refinancing rate has been reduced from 0.25% to 0.15%, the marginal loan facility from 0.75% to 0.4% and, for the first time ever, the short-term deposit rate has moved into negative territory, from zero to -0.1%.
The ECB repeated its “forward guidance” with Draghi saying that interest rates “will stay low, possibly for longer than previously foreseen and this will feed into money market conditions”.
In order to support lending for households (but not mortgage lending) and non-financial companies in the private sector, the ECB will be “conducting a series of targeted longer-term refinancing operations (TLTROs). All TLTROs will mature in September 2018, i.e. in around 4 years. Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014”. Two TLTROs will be carried out in September and December, both maturing in September 2018.
Further quarterly injections of capital will take place from March 2015 to June 2016, when banks will be able to borrow up to three times their net lending (not including mortgages). The interest rate on the TLTROs will be fixed over the life of each operation, at the rate on the eurosystem's main refinancing operations (MROs) prevailing at the time of take-up, plus a fixed spread of 10 basis points
Measures will be taken to ensure the TLTROs are of benefit to the real economy. The TLTRO cash must not be used to buy sovereign bonds or fund the state or invest in anything that might create a speculative bubble, stated Draghi.
The ECB decided to step up its preparatory work on bundles of loans that are made to small businesses in the form of bonds (ABS). Draghi said they did not discuss the scope, but ABS should be oriented towards the real economy and the ideal ABS would be “simple, with no complex CDO cubes or squares, based on real loans not derivatives and should be transparent”. The ECB will extend the 2007 MROs and stop sterilising the SMP bond purchase programme, which had been introduced when inflation was higher “but we are now in a different world”.
ECB is prepared to do more ... Draghi said the ECB had more measures up its sleeve and, in line with its mandate, is prepared to use unconventional instruments to achieve its price stability objective if necessary, such as a massive asset purchase scheme. It does not seen any risk of deflation, but expects a very long period of low inflation and says it will remain vigilant.
… but will not substitute for government action. The package of measures unveiled on Thursday should not be seen as an incentive for governments to drop their structural reform plans. Draghi said progress had been made in this domain but more still needed to be done.
Unemployment remains high and recovery is forecast to be lower this year than suggested in March. Growth is expected to reach 1% of GDP in the eurozone in 2014, 1.7% in 2015 and 1.8% in 2016. Downside risks to the economy are geopolitical and related to developments in emerging markets. Other risks are insufficient pursuit of structural reforms and lower than expected domestic demand.
Flurry of reaction. The ECB's decision was welcomed in France with Finance Minister Michel Sapin describing it as a “strong signal'” and “welcome support for growth against a backdrop of budget consolidation”. The French president, Francois Hollande, who was in Brussels for the G7 summit, welcomed the way the decision had come and pointed out that banks play a major role in the real economy. German Chancellor Angela Merkel said that the ECB was totally independent in its decision-making and she took note of the measures. Without referring directly to the ECB's decision, the president of the European Council, Herman Van Rompuy, said that low inflation was a handicap for economies with high levels of public and private debt. Small business pressure group UEAPME welcomed “extraordinary measures taken by the ECB to support SME lending”.
The euro closed down slightly against the dollar on Thursday after the ECB announcements. (EL, AN, CG and EH)