ECB leaves rate steady, launches new funding scheme

April 30, 2020

By CentralBankNews.info

The European Central Bank (ECB) left its key interest rates steady but launched another emergency funding operation to support liquidity in the financial system and lowered the interest rate on one of its existing long-term funding operations at a time most economic activity worldwide has ground to a halt.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” said ECB President Christine Lagarde, estimating the economy of the 19-nations that share the euro currency could shrink between 5 percent and 12 percent this year depending on how long measures to contain the coronavirus remain in place and the success of policies to ease the economic consequences.
The ECB, which has already cut interest rates to the lower bound, lowered the interest rate on its targeted longer-term refinancing operations (TLTRO III), which was launched in March, to 50 basis points below the average rate on refinancing operations during the period from June 2020 to June 2021.
And for financial institutions whose lending to businesses reach the ECB’s threshold, the interest rate will be even lower, at 50 basis points below the ECB’s deposit rate.
The ECB has maintained its benchmark refinancing rate at 0.0 percent and the lending rate at 0.25 percent since March 2016 but in September 2019 it lowered the deposit rate to minus 0.50 percent.
Lagarde confirmed the ECB’s guidance the interest rates will remain at their present or lower levels until inflation “robustly” converges to a level that is sufficiently close to, but below 2 percent.
In addition to its new funding program, the ECB’s governing council said it would continue to purchase assets at a monthly pace of 20 billion euros under its asset purchase program (APP) along with a temporary 120 billion envelope until the end of the year.
It also confirmed that it expects these asset purchases to run for as long as necessary and only end shortly before its starts raising key interest rates.
In March the ECB launched a 750 billion euro Pandemic Emergency Purchase Program (PEEP) to help ease its overall monetary policy stance and counter the risk to its monetary policy transmission and the outlook for the euro area economy.
Today the ECB launched another program to boost liquidity in the euro area financial system that will be known as PELTRO (non-targeted pandemic emergency longer-term refinancing operations).
PELTROs comprise seven additional refinancing operations that begin in May and then mature in staggered sequence between July and September 2021, The operations will be carried out as fixed tenders with full allotment with an interest rates that is 25 basis points below the refinancing rate.
The ECB said it was fully prepared to increase the size of the PEPP program “by as much as necessary and for as long as needed.”
“In any case, it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” ECB said.
Lagarde said the pandemic and containment measures had taken a toll on production and domestic demand in the euro area and the downturn in April activity suggests the impact is “likely to be even more severe in the second quarter.”
“Given the highly uncertain duration of the pandemic, the likely extent and duration of the imminent recession and the subsequent recovery are difficult to predict,” she said, pointing to initial estimates by staff – ahead of a June forecast – that see gross domestic product falling by between 5.0 percent and 12 percent in 2020.
Inflation in the euro area has also been falling in recent months and fell to 0.4 percent in April from 0.7 percent in March, and the ECB expects its to decline even more in coming months due to the lower prices of oil along with the impact of lower economic activity.

The European Central Bank released the following statement on its policy decision followed by the introductory statement to the press conference by its president, Christine Lagarde:

“At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The conditions on the targeted longer-term refinancing operations (TLTRO III) have been further eased. Specifically, the Governing Council decided to reduce the interest rate on TLTRO III operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations prevailing over the same period. Moreover, for counterparties whose eligible net lending reaches the lending performance threshold, the interest rate over the period from June 2020 to June 2021 will now be 50 basis points below the average deposit facility rate prevailing over the same period.
(2) A new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) will be conducted to support liquidity conditions in the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop. The PELTROs consist of seven additional refinancing operations commencing in May 2020 and maturing in a staggered sequence between July and September 2021 in line with the duration of the collateral easing measures. They will be carried out as fixed rate tender procedures with full allotment, with an interest rate that is 25 basis points below the average rate on the main refinancing operations prevailing over the life of each PELTRO.
(3) Since the end of March, purchases have been conducted under the Governing Council’s new pandemic emergency purchase programme (PEPP), which has an overall envelope of €750 billion, to ease the overall monetary policy stance and to counter the severe risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus pandemic. These purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. The Governing Council will conduct net asset purchases under the PEPP until it judges that the coronavirus crisis phase is over, but in any case until the end of this year.
(4) Moreover, net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year. The Governing Council continues to expect monthly net asset purchases under the APP 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.
(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.
(6) 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.
The Governing Council is fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed. In any case, it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
Further details on the amendments made to the terms of TLTRO III and on the new PELTROs will be published in dedicated press releases this afternoon at 15:30 CET.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.