It has thrown the kitchen sink, to little effect. Has it got anything left?by George Magnus / March 10, 2016 / Leave a comment
Read more: Just what the world doesn’t need—a banking panic
Ahead of today’s European Central Bank meeting, it was expected that to stir the eurozone’s economy the Bank would have to announce strong measures. In the event, it went even further, and threw the kitchen sink at the eurozone. But apparently, this has had little effect.
So what did the ECB announce that was so substantial? For starters, The negative interest rate on the Bank’s main deposit facility was lowered from -30 to -40 basis points. This is what other banks are charged to hold deposits at the ECB.
The monthly bond purchases under the ECB’s QE programe will be raised from €60 to €80 billion a month. Though the March 2017 end-date for the programme has been kept, Mario Draghi (President of the ECB) did say that it might be extended if necessary. The ECB will also include in its asset purchases investment-grade, non-bank corporate bonds, with effect from June.
It will also introduce four targeted long-term refinancing operation facilities with a maturity of four years. These are loans to banks to help them bolster liquidity. Draghi also said that for banks whose net lending exceeded a certain benchmark, the interest rate charged on these loans could be as low as on the deposit rate facility. In other words the ECB will, under some circumstances, pay banks to take the loans in order to on-lend the proceeds. In effect, anyway.
In truth, bank shares did perk up smartly after the announcement, and European stock markets rallied as they always do if the central bank is throwing liquidity around. But one hallmark of a successful move from the ECB would have been a sharp fall in the euro, which happened initially but then promptly reversed itself. A more telling sign still that the ECB was on to something would have been a significant rise in German bond yields and the bond yields of other countries. This has always been the litmus test of whether the bank’s polices will…