Draghi has spoken, with his boldest move since taking command
The euro zone patient is still alive but it is definitely not kicking
“The key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation.”
There was more. The ECB entered new territory by introducing a negative interest rate of minus 0.1 per cent on money commercial banks hold on deposit with the central bank.
By charging for the security of the ECB haven, Draghi and his fellow governors are pushing banks to take their money from storage and lend more it into the economy at large. The minus 0.1 per cent rate will also apply to banks’ average reserve holdings in excess of the minimum reserve requirement.
The measure may also serve to diminish the attractiveness of euro assets to investors, helping to bring down the exchange rate and adding to inflation via rising prices for imports into the euro zone.
The second major element of the package is to funnel as much as €400 billion into the commercial banking system via a new ultra-cheap lending scheme to be known as “targeted longer-term refinancing operations” or TLTROs. This is not dissimilar to a previous LTRO initiative by the ECB, the difference this time being that banks will be obliged to utilise the money they draw down for lending to credit-starved businesses. The ultimate recipients must be “non-financial private sector” borrowers and mortgage lending for homes and public sector lending is excluded.
Given that small and medium-sized firms suffer most in the credit drought, they should be first in line to benefit. This is the targeting referred to in the TLTRO title.
In sum, this money cannot be recycled to buy government bonds. “Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required pay back borrowings in September 2016,” Draghi said.
The ECB further resolved to intensify preparations to support the market in the euro zone for asset-backed securities. The proviso, however, is that any transactions are confined to simple and transparent securities whose underlying assets consist of claims against market participants in the non-financial private sector.
The bank also decided to keep open the provision of unlimited liquidity “for as long as necessary” and at least until the end of 2016.
Even as it seeks to wean healthy banks off emergency support, the ECB is keeping open the lifeline for struggling lenders.
Draghi has spoken. Next comes the response in the real economy.