Fra Nordea:
The ECB announced a package of measures to shield the Euro area economy from the impact of the covid-19 virus, but left rates unchanged.
The announced package comprises:
- An increase in the APP by EUR 120bn until year-end, with a focus on the private sector purchase programmes
- Additional longer-term refinancing operations (LTROs) with an interest rate that is equal to the deposit rate will be conducted, temporarily, to provide liquidity to bridge the period until the TLTRO III
- TLTRO III will be offered at even more favourable rates, which can be 25bps below the DFR
The ECB did not deliver the rate cut that markets were anticipating and did not alter the forward guidance.
The ECB as a banking supervisor also temporarily relaxed some of the capital requirements and other type of regulation on banks in order to guarantee banks’ ability to provide finance to the real sector and weather the current shock.
Small disappointment in financial markets
The initial market reaction was surprisingly muted, given the high expectations and the broad range of options the ECB had at its disposal. Equity prices fell, the EUR strengthened and longer bond yields fell.
As the central bank refrained from cutting rates, the short end pricing needed a clear adjustment. After all, the markets had priced in more than a 10bp deposit rate cut. However, the short end pricing still illustrates expectations of another 20bp of rate cuts later this year, which still looks to be on the high side given the reluctance of the ECB to cut rates today.
Volatility in financial markets is likely to stay elevated during Lagarde’s press conference.
President Lagarde will give her comments on the decision in the press conference at 14:30 CET, and further details on the new operations are published in press releases at 15:30 CET.
