The European Central Bank (ECB) said it plans to keep rates on hold for the rest of the year and pledged to offer of cheap funding for the region’s banks in the face of faltering eurozone economy.
At its meeting on Thursday, the ECB said it planned to launch a new series of quarterly targeted longer-term refinancing operations in bid to boost growth.
The stimulus – the Targeted Longer-Term Refinancing Operations (TLTROs) – comes just three months after (ECB) formally ended its €2.6bn quantitative easing programme in December. The TLTROs will start in September 2019 and end in March 2021, each with a maturity of two years, the central bank said.
The ECB has substantially cut back the 2019 real GDP growth outlook for the euro area from 1.7% to only 1.1% in the face of a significant darkening of the economic and inflation outlook. ECB president Mario Draghi highlighted deteriorating economic data, geopolitical factors and the rise of populism as headwinds.
“As growth cools, the European Central Bank is taking no chances with the banking system by offering cheap liquidity until 2023 via its targeted longer-term refinancing operations,” said Nick Wall, a fixed income portfolio manager at Merian Global Investors.
“It also extended its forward guidance with rates expected to remain at present levels ‘at least through the end of 2019’, which is roughly in-line with market pricing. This helps at the margins by keeping the cost of credit cheap, but the issue in Europe has been demand for credit.
“For money demand to increase, Europe will be looking for an upswing in Chinese growth to boost its exports and for governments to boost spending. An increase in consumer confidence would also reduce the savings rate that picked up following a turbulent fourth quarter of 2018,” he said.
“The ECB is doing all it can within its legal framework to keep money cheap, but until the demand for money picks up meaningfully, it will be pushing on a string.”
A pre-emptive move
Seema Shah, senior global investment strategist, Principal Global Investors said that for one of the first times in its short life, the ECB has been pre-emptive rather than reactive.
“By announcing new liquidity operations earlier than the market was anticipating, the ECB has moved ahead of the curve and provided strong reassurance to the banking sector – and to the real economy to some extent – that it will provide support if required,” she said.
“Admittedly, these TLTROs themselves are unlikely to provide strong stimulus, but demonstrating its intent to act is half the job done.”
“In addition, the ECB provided forward guidance on policy rates through the end of 2019. With the ECB deposit rate in negative territory, further rate cuts were out of the question. The inability to pass on the negative rates to depositors means that banks net interest margins get squeezed when they deposit excess reserves at the ECB, cutting away at profitability, capital and their ability to lend.
“No wonder then that negative rates have been drawing criticism from banks across northern Europe and the ECB has, if anything, been receiving calls for rate hikes,” Shah said.
