Faced with a further downward revision of the medium-term inflation outlook, the ECB took five accommodative monetary policy measures on Thursday 12 September, including action on its main key rates and the relaunch of a massive buyback programme for financial securities.
"With today’s comprehensive package of monetary policy decisions, we are providing substantial monetary stimulus to ensure that financial conditions remain very favourable and support the euro area expansion", as well as inflation convergence towards an outlook consistent with our mission, said Monetary Institute President Mario Draghi.
The Governing Council has therefore taken the following measures:
Rates. The rate on the deposit facility has been revised downwards from -0.40% to -0.50%, while the other two ECB key rates remain unchanged (0.00% for the main refinancing operations and 0.25% for the marginal lending facility).
The ECB is strengthening its forward guidance by no longer setting the horizon for a rate increase in summer 2020. Thus, rates will remain at or below their current level until the inflation outlook "robustly" converges to a level consistent with the Institute's mission, i.e. close to but less than 2%, and until this convergence is "consistently" reflected in underlying inflation dynamics (excluding energy and food prices).
APP. The Governing Council also decided to relaunch, as from 1 November, its Asset Purchase Program (APP), for a monthly amount of 20 billion euros. This pace of acquisitions in secondary markets will continue "for as long as necessary" in order to reinforce the accommodating impact of the interest rate policy, but will end shortly before rates are raised again.
According to Mr Draghi, the Governing Council did not have to discuss the limits for relaunching the program, as long as the institute has enough headroom to move forward "for quite a long time".
Another related measure: principal payments from maturing securities purchased under the APP for an extended period of time past the date of a return to rate increases.
In addition, the Governing Council amended the long-term bank refinancing operation 'TLTRO III' in order to maintain good credit conditions. Finally, a two-tier system for the remuneration of bank deposits will be introduced so that the excess liquidity placed by banks at the ECB counter does not suffer from the negative deposit facility rate.
The President of the ECB, who will leave office on 1 November to make way for Christine Lagarde (see EUROPE 12320/4), gave three reasons to justify this new round of accommodating measures: - a "more marked than expected" slowdown in economic growth; - the persistence of downside trade and geopolitical risks; - the downward revision of inflation expectations, while the "relatively favourable" baseline scenario on which the ECB based its action "does not include the risk of a hard Brexit the probability of which is going up".
On Thursday, the monetary institute lowered its price increase forecast, setting the new trajectory at 1.2% in 2019, 1.0% in 2020 and 1.5% in 2021. Its growth forecasts for the euro area have also been revised downwards for 2019 and 2021. Wealth creation is expected to reach only 1.1% in 2019, 1.2% in 2020 and 1.4% in 2021.
When asked about the level of support from the Governing Council for all the measures adopted, Mr Draghi said that all Governors were convinced of the need for action. Some of them were less so on the extent of the measures finally adopted, the opportunity to relaunch the bond buyback programme being the most controversial. But in the end, "the consensus was so broad that there was no need to take a vote", Draghi said.
Finally, the former Governor of Banca d'Italia stressed that the measures adopted on Thursday by the ECB, which were well received by the markets, will have a stronger and faster impact if euro area countries implement coherent fiscal policies, where countries in difficulty reform their economies and those with sufficient margins invest to support their economies.
"It is high time for the fiscal policy to become the main instrument", Draghi said. He did not call for a reform of the Stability Pact, but for its full respect.
For more information on monetary decisions: http://bit.ly/2lKGDjd (Original version in French by Mathieu Bion)