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EMU CommentCompromised stimulus package is no 'big bazooka'

  1. 10 basis points rate cut, reinforced forward guidance
  2. Smaller but open-ended quantitative easing returns in Q4, tiering introduced, changes to TLTRO-III
  3. Compromise compromises the expected effect of the new package
10 basis points rate cut, reinforced forward guidance
In its September meeting, the ECB's Governing Council voted to lower its key rate, as we expected: the interest rate on the deposit facility will be -0.5 percent, whereas the rates on the main refinancing operations and the marginal lending facility will remain at 0.00 percent and 0.25 percent respectively. The bank further reinforced its forward guidance and 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 percent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
Smaller but open-ended quantitative easing returns in Q4, tiering introduced, changes to TLTRO-III
As we expected, the ECB announced it will restart its asset purchase programme (APP) later in Q4. The details were sparse, and included no indication of the composition across asset classes. Nonetheless, the announcement noted that the programme will amount to monthly purchases at a pace of EUR 20bn from November 1. The ECB expects them to run for as long as necessary and to end shortly before it starts raising the key ECB interest rates. As we expected, the ECB introduced a tiered interest rate system: a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate. Moreover, there were changes to TLTRO-III: The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in 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 operation. The maturity of the operations will be extended from two to three years.
Compromise compromises the expected effect of the new package
The stimulus package was smaller than most expected, in particular with regards to the APP. Without further details on asset class composition, in our view, the announced package is unlikely to have a significant effect on our expectation inflation trajectory over the foreseeable future. There is, however, a possibility that further changes at a later date could increase the potency of the package. Market reactions were modest with the euro weakening, consistent with the somewhat curbed enthusiasm in market sentiment observed in recent days.

Disclaimer
 Erik Meyersson

Erik Meyersson

Senior Economist

Eurozone

erme03@handelsbanken.se

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