MNI REVIEW: ECB Cuts Rates, Relaunches QE

By Luke Heighton

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

targeted longer-term refinancing operations and asset purchases running until it

is almost time to raise interest parts were announced by the European Central

Bank as it sought to counter 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 Nov. 1 at a monthly rate of E20 billion, Draghi said, and will run "for as

long as necessary" until shortly before the Governing Council starts raising the

key ECB interest rates.

     The ECB said it would also buying assets with yields below its deposit

facility rate.

     The Governing Council also agreed to a two-tier system for remunerating

excess liquidity holdings, with a partial exemption from the negative deposit

facility rate from Oct. 30. 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.

     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.

     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.

     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 disagreement among Governing Council members over the

severity of the economic outlook and the 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."

     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."

     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 become

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

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