Christine Lagarde ECB europe Markets

ECB Expands QE By €120 Billion, Announces New Liquidity Measures, Relaxes Capital Ratios, Leaves Rates Unchanged

Lagarde is credible. It's just not clear whether she's credible as a central banker. We're about to find out.

Earlier this week, Christine Lagarde warned that without a coordinated global policy response, the world “will see a scenario that will remind many of us of the 2008 Great Financial Crisis”.

She was speaking on a conference call, two days ahead of the ECB’s March policy decision. The Fed, BOE, RBA and BOC have already cut rates this month.

Lagarde is no stranger to crises. She’s also a consensus builder and a seasoned politician. She’ll need to marshal that formidable skill set over the next several months. The COVID-19 epidemic is most assuredly a crisis in Europe, and, as documented here on Wednesday, Europe came into 2020 hobbled economically.

Read more: Christine Lagarde Has 2008 Déjà Vu (Mrs. Lancaster)

Having set the stage with the 2008 allusion on Tuesday, Lagarde on Thursday delivered a package that includes enhanced liquidity measures and more QE. Rates were left rates unchanged.

Here’s the announcement on the enhancement of liquidity tools/operations:

In TLTRO III, considerably more favourable terms will be applied during the period from June 2020 to June 2021 to all TLTRO III operations outstanding during that same time. These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises. Throughout this period, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations. For counterparties that maintain their levels of credit provision, the rate applied in these operations will be lower, and, over the period ending in June 2021, can be as low as 25 basis points below the average interest rate on the deposit facility. Moreover, the maximum total amount that counterparties will henceforth be entitled to borrow in TLTRO III operations is raised to 50% of their stock of eligible loans as at 28 February 2019. In this context, the Governing Council will mandate the Eurosystem committees to investigate collateral easing measures to ensure that counterparties continue to be able to make full use of the funding support.

As for QE expansion, here’s what the ECB is offering on that front:

A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes. In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty.

The forward guidance around QE entails continuing asset purchases as long as necessary “to reinforce the accommodative impact of its policy rates”. Again: This is the very definition of open-ended, despite this new “envelope” having a number attached to it.

The ECB will also allow banks to run lower capital ratios due to the virus.


Things really didn’t need to get anymore complicated for the ECB ahead of Thursday’s policy decision. But they did anyway when Donald Trump announced travel restrictions between the US and the EU, leading directly to another harrowing plunge in European equities.

Thursday’s rout makes the following simple chart even more tragically comedic.

To be clear, Lagarde is credible. It’s just not clear whether she’s credible as a central banker. But we’re about to find out.

September’s ECB easing package (a rate cut, the restart of net asset purchases and tiering) was generally seen as pushing the limits already, and the decision to buy more assets was one of the most internally contentious moves of Mario Draghi’s tenure.

That means pushing the envelope even further was a tall order, even under the current exigent circumstances, and even as some analysts saw an expansion of asset purchases as necessary, if only on a temporary basis. Constraints on PSPP and CSPP are to a large extent self-imposed, although lifting various thresholds and relaxing limits could come with significant moral hazard.

Italy is seeking to expand the deficit in order to help provide stimulus to the country’s beleaguered economy in the face of a nationwide lockdown and at this juncture, you could easily argue that the central bank should just ignore critics who charge the ECB with financing governments. If the current situation doesn’t call for direct government financing, then it’s hard to see what would – Bubonic plague redux maybe?

On the rates front, the ECB has arguably hit the point of diminishing returns. There’s nowhere to go. But, that doesn’t rule out a rate cut later. The virus has given policymakers the green light to expand an already unprecedented experiment in accommodation.

Targeted measures to help countries and institutions hard-hit by the virus are a virtual certainty going forward.

When it comes to the economic projections, it’s largely pointless to even speculate. The virus means all bets are off, and while the GC will probably mark down expectations, don’t expect an acknowledgment that a recession is inevitable – even if it is.

Full ECB statement

12 March 2020

At today’s meeting the Governing Council decided on a comprehensive package of monetary policy measures:

(1) Additional longer-term refinancing operations (LTROs) will be conducted, temporarily, to provide immediate liquidity support to the euro area financial system. Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need. They will be carried out through a fixed rate tender procedure with full allotment, with an interest rate that is equal to the average rate on the deposit facility. The LTROs will provide liquidity at favourable terms to bridge the period until the TLTRO III operation in June 2020.

(2) In TLTRO III, considerably more favourable terms will be applied during the period from June 2020 to June 2021 to all TLTRO III operations outstanding during that same time. These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises. Throughout this period, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations. For counterparties that maintain their levels of credit provision, the rate applied in these operations will be lower, and, over the period ending in June 2021, can be as low as 25 basis points below the average interest rate on the deposit facility. Moreover, the maximum total amount that counterparties will henceforth be entitled to borrow in TLTRO III operations is raised to 50% of their stock of eligible loans as at 28 February 2019. In this context, the Governing Council will mandate the Eurosystem committees to investigate collateral easing measures to ensure that counterparties continue to be able to make full use of the funding support.

(3) A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes. In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty.

The Governing Council continues to expect net asset purchases to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

(4) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

(5) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.


 

3 comments on “ECB Expands QE By €120 Billion, Announces New Liquidity Measures, Relaxes Capital Ratios, Leaves Rates Unchanged

  1. Cue the Biden Plunge Protectors…

  2. I know there were some complaints about a few things she said. For me, watching her press conference was calming. It felt like there was an adult in the room.

    • Lagarde is an adult and sounds like one as well. Regardless, she made a major mistake in her attempt to calm markets with her announcement. Her dismissal of the problem of rapidly expanding credit spreads showed her to be tone deaf to a major concern.

      One would hope for a rapid reassessment on that point by the ECB.

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