Euro­pean Cen­tral Bank to ex­pand QE, cuts in­ter­est rates fur­ther

The Pak Banker - - FRONT PAGE -

Mario Draghi un­leashed his most au­da­cious stim­u­lus pack­age yet, un­ex­pect­edly test­ing the lower bounds of all the Euro­pean Cen­tral Bank's in­ter­est rates and ex­pand­ing its monthly bond pur­chases by a third. The euro sank and stocks rose. The 25-mem­ber Gov­ern­ing Coun­cil, meet­ing in Frank­furt on Thurs­day, cut the rate on cash parked overnight by banks by 10 ba­sis points to mi­nus 0.4 per­cent and low­ered its bench­mark rate to zero. Bond pur­chases were in­creased to 80 bil­lion euros ($87 bil­lion) a month from 60 bil­lion euros, and cor­po­rate bonds will now be el­i­gi­ble. A new se­ries of long-term loans to banks will be­gin in June.

The pack­age ex­ceeded mar­ket ex­pec­ta­tions for more stim­u­lus and may sig­nal in­creas­ing con­cern about per­sis­tent weak­ness in con­sumer prices and a Chi­nese slow­down. Draghi -- who will present new eco­nomic fore­casts -- has re­peat­edly said pol­icy mak­ers are will­ing to do what's nec­es­sary to re­vive in­fla­tion and un­der­pin the re­gion's up­turn.

"This is pre­sum­ably an ex­am­ple of what­ever it takes," said Ste­wart Robert­son, an econ­o­mist at Aviva In­vestors in Lon­don, which man­ages about $378 bil­lion in as­sets. "So far so good. Now let's see if it feeds into the real econ­omy." The euro sank 1.3 per­cent to $1.0856 at 2:13 p.m. Frank­furt time. The Stoxx Europe 600 In­dex jumped more than 2 per­cent.

The fo­cus now shifts to Draghi's ex­pla­na­tion of the pack­age and its po­ten­tial im­pact on banks. Neg­a­tive rates have been crit­i­cized for squeez­ing bank prof­itabil­ity to the point they curb lend­ing.

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 un­der QE.

The ECB said its new round of tar­geted re­fi­nanc­ing op­er­a­tions will start in June. The cen­tral bank said the in­ter­est rate "can be as low as the in­ter­est rate on the de­posit fa­cil­ity."

"The word ba­zooka comes to mind," said Chris Hare, an econ­o­mist at In­vestec Plc in Lon­don. "We're look­ing for more de­tails now on the TLTRO - ex­actly how that would work - and also mea­sures that would mit­i­gate the im­pact of neg­a­tive rates on banks."

The Euro­pean Cen­tral Bank cut all three of its in­ter­est rates and ex­panded its as­set-buy­ing pro­gram on Thurs­day, de­liv­er­ing a big­ger-than-ex­pected cock­tail of ac­tions to boost the econ­omy and stop ul­tra low in­fla­tion be­com­ing en­trenched. Sur­pris­ing mar­kets, it cut its main re­fi­nanc­ing rate to zero from 0.05 per­cent. The euro fell around 1 per­cent against the dol­lar.

Hop­ing to boost lend­ing, con­sump­tion and in­fla­tion, the ECB said it would also start buy­ing cor­po­rate debt and would also launch four new rounds of cheap loan pack­ages, to be ex­tended by banks to the real econ­omy.

The ECB has lit­tle to show for the 700 bil­lion euros it has spent buy­ing govern­ment bonds and other as­sets in the past year, as tum­bling raw ma­te­ri­als prices blunt the im­pact of its quan­ti­ta­tive eas­ing.

That raises the risk that peo­ple will lose faith in the bank's com­mit­ment to its man­date. In­fla­tion has been below the ECB's nearly 2 per­cent tar­get for three years and is likely to re­main so for many more. The ECB cuts its de­posit rate to -0.4 per­cent from -0.3 per­cent, in line with ex­pec­ta­tions, but it also sur­prised mar­kets by cut­ting its other two in­ter­est rates. As well as the re­fi­nanc­ing rate, which means banks can now bor­row at its weekly auc­tions at no cost, it cut the marginal lend­ing rate, used by banks to bor­row from the ECB overnight, to 0.25 per­cent from 0.3 per­cent.

Al­though in­fla­tion ex­pec­ta­tions have fallen sharply in re­cent months on lower crude oil prices, Europe's growth prospects have held up rel­a­tively well as do­mes­tic con­sump­tion is prov­ing re­silient to a slow­down in emerg­ing mar­kets. Weak busi­ness and in­dus­trial sen­ti­ment in­di­ca­tors have how­ever sug­gested that Europe is fac­ing in­creas­ing head­winds, par­tic­u­larly from slow­ing growth in China.

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