MNI POLICY: 'Infinite APP' Part of Fresh ECB Package

By Luke Heighton

     FRANKFURT (MNI) - A rate cut, tiering, stronger forward guidance, extended

targeted longer-term refinancing operations and 'infinite APP' were all part of

the European Central Bank's latest policy package, as it sought to counter yet

another fall in predicted growth and inflation rates.

     ECB President Mario Draghi announced a 10bps cut to the deposit rate,

taking it -0.50% while saying that the Governing Council "now 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."

     Net asset purchases, abandoned at the end of December 2018, will resume

from November 1 2019 at a monthly rate of EUR 20billion, Draghi said, and will

run "for as long as necessary" before ending shortly before the Governing

Council starts raising the key ECB interest rates.

     As part of the announcement, the ECB extended the possibility of buying

assets with yields below deposit facility rate to all part of its asset purchase

activities, including private sector purchase programmes, with immediate effect.

     The Governing Council also agreed to the introduction of a two-tier system

for remunerating excess liquidity holdings, with a partial exemption from the

negative deposit facility rate from 30 October 2019. The exempt tier will be

remunerated at the annual rate of 0%, and be determined as a multiple of an

institution's minimum reserve requirements. The multiplier will be the same for

all institutions.

     TLTRO III will now run for three, rather than two years, while the

previously announced 10-basis point spread above the average interest rate of

the ECB's main refinancing operations (MROs) and, for counterparties exceeding

their lending benchmark, above the average interest rate on the deposit

facility, will no longer be applied.

     This means that the interest rate for TLTRO III will now be equal to the

average rate applied to the Eurosystem's MROs over the life of the respective

TLTRO III operation. For counterparties whose eligible net lending between the

end of March 2019 and the end of March 2021 exceeds their benchmark net lending,

the rate applied to TLTRO III operations will be lower, and can be as low as the

average interest rate on the deposit facility prevailing over the life of the

respective TLTRO III operation.

     However counterparties will be able to repay the amounts borrowed under

TLTRO III earlier than their final maturity, at a quarterly frequency starting

two years after the settlement of each operation.

     Today's decisions were in response to the continued shortfall of inflation

with respect to the ECB's aim, Draghi said, with incoming information indicating

a "more protracted" weakness of the euro area economy, the persistence of

prominent downside risks and muted inflationary pressures.

     September's ECB staff macroeconomic growth projections were revised

downwards, from 1.2% to 1.1% in 2019, and from 1.4% to 1.2% in 2020, with 2021

holding steady 1.4%. Projected inflation fell from 1.3% to 1.2% in 2019, from

1.4% to 1.0% in 2020, and from 1.6% to 1.5% in 2021.

     While there was some disagreement among Governing Council members over the

severity of the economic outlook and need to act immediately, Draghi said,

"there was unanimity that fiscal policy should become the main instrument," and

that governments with fiscal space "should act in an effective and timely

manner."

     "We still think that the probability of a recession in the euro area is

small," he added, "but it has gone up." Overall, Draghi said, "the package is

quite powerful both in the short run and in the long run."

     On the subject of what bonds the ECB can continue to buy, Draghi said there

was "no appetite" among Governing Council members to discuss limits "because we

have the headroom to go on for quite some time without raising the discussion

about limits."

     The decision to introduce tiering was taken in order to protect the

transmission of the ECB monetary policy through the lending channel, he said.

     Draghi also appeared to formally announce what had until now only been

assumed; that "the next president will carry out a strategic review together

with the Governing Council."

     But he dismissed the suggestion that so-called helicopter money may yet be

part of the ECB's monetary policy toolkit, saying: "Giving money to people in

whatever form is a fiscal policy task, not a monetary policy task."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com