Tag: ECB

ECB Monetary Policy Decisions

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from the operation to be settled on 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.

Here is a video of their press conference.

 

ECB European QE To Start With “Shock-and-awe”

So the European Central Bank (ECB), QE programme is confirmed. Overnight, President Mario Draghi announced the launch of an open-ended, expanded monthly 60 billion euro (US$70 billion) private and public bond-buying program. However, the programme is open-ended until at least 2016 and could amount to as much as a trillion euros.

The program will start in March this year. The hope is that it will boost the region’s painfully low inflation rate, which came in at an annual minus 0.2 percent in December. Draghi said:

Inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments.

This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued. Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.

Looking ahead, today’s measures will decisively underpin the firm anchoring of medium to long-term inflation expectations. The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.

The ECB is joining the U.S. Federal Reserve, Bank of England and Bank of Japan in launching a quantitative easing (QE) scheme.

Looking at the scheme in more detail, the ECB will purchase euro-denominated investment-grade securities only. However, debt that is trading with a negative yield will also be eligible for the program. Draghi also said that in the event of a sovereign restructuring or default, public and private bondholders would be treated on equal terms. Twenty percent of the additional purchases will be subject to risk-sharing arrangements, designed to limit the amount of risk the ECB takes on to its balance books. The majority of risk will remain with euro zone national central banks. No more than 25 percent of each debt issue will be purchased. The maturities of the debt purchases will range between two and 30 years.

It is worth noting that the ECB also announced it would hold its main interest rate unchanged at 0.05 percent, with the rate on its marginal lending facility at 0.30 percent. The rate on its deposit facility was held at -0.20 percent. Yes, that is a negative number, so deposits are attracting a charge!

Where The European Banks’ Bodies Are Buried

Over the weekend there was a lot of coverage on the results from the European Central Bank’s stress testing – looking at how banks would respond if for example, house prices were to fall, or exchange rates move significantly. Actually, of the 130 banks tested, 25 failed, but many were smaller players in southern Europe, and are already in the process of plugging the gaps. Stress tests by their nature are imprecise, and market reaction was as expected.

The much more interesting aspect though was the parallel testing under the Asset Quality Review. According to the Economist, this was only applied to 123 big banks in the euro zone’s 18 countries, which from next month will be regulated by the ECB instead of national watchdogs.

The ECB found €136 billion in troubled loans banks had not fessed up to, bringing the European total to €879 billion ($1.1 trillion). Italy will have to implement the biggest reclassification of loans (€12 billion), with Greek (€8 billion) and German banks (€7 billion) also challenged.

Many banks that thought they might fail the tests have raised over €45 billion in equity, strengthening them considerably. That explains why only 12 banks will have to unveil plans to raise capital when 25 have apparently failed, including Eurobank in Greece, Monte dei Paschi di Siena in Italy and Portugal’s BCP, the only three with more than €1 billion to raise. They now have to come up with plans to strengthen their balance sheets.

These tests are as much a stress test of the European Central bank which is taking on an ever more important role, as the individual banks themselves.