MNI REVIEW: ECB Expands QE, But Holds Key Rate

By Luke Heighton

     FRANKFURT (MNI) - The European Central Bank on Thursday expanded

quantitative easing with a "temporary envelope" of an additional net asset

purchases of EUR120 billion, and said it would provide temporary longer-term

refinancing operations as well as cut the rate offered on existing TLTROs, but

left its deposit rate unchanged.

     The measures will, together with monetary policy stimulus already in place,

support liquidity and funding conditions for households, businesses and banks,

said ECB President Christine Lagarde, who also called for an"ambitious,

coordinated fiscal policy" response to offset the threat posed by the COVID-19

epidemic.

     Fiscal policy is "first and foremost, and on the front line," she said, and

"all governments need to be on deck and ready to act" to the "major" and

"severe" shock facing euro area economies, albeit a temporary one "if the right

measures are taken by all the players."

     Members of the ECB's Governing Council were "unanimous" in their support

for the package announced, as she pledged to make use of all the tools at her

disposal, including "all the flexibility that is embedded in the framework of

the APP," without committing to exceeding or changing issuer limits for

sovereign debt.

     --"NOT HERE TO CLOSE SPREADS"

     In a remark which preceded a selloff of Italian government bonds, Lagarde

dismissed perceptions of market disappointment with the size of the package,

saying "We are not here to close spreads, there are other tools and other actors

to deal with these issues."

     Lagarde said the ECB's asset purchases would emphasise corporate bonds,

with a "strong contribution" from the private sector purchase programmes."

     The ECB has "certainly not" reached the lower bound for key interest rates

or the reversal interest rate - the point at which further rate cuts become

counterproductive, she said.

     Nevertheless, the effectiveness of the response to the economic dangers

posed by the coronavirus pandemic "will depend on the speed and strength and

collective approach of all players, especially fiscal authorities," she added.

     "In particular, government measures such as providing credit guarantees are

needed to complement and reinforce the monetary policy measures taken today."

     The ECB was "attentive" to developments in the currency markets, Lagarde

said, although such variations are "not a determining factor" in the policy

stance.

     Asked how the ECB's package measured up to that announced by the Bank of

England earlier this week, Lagarde rejected the comparison as "odious." But, she

insisted, "I call it decisiveness, I'm sorry to say."

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

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

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