Yesterday, as we had suspected would be the case, the ECB relaxed its monetary stance more than the markets had been expecting. However this is primarily likely to support financial markets but change little as regards low growth or low core inflation. If in doubt, the ECB will probably raise the dose later in the year, despite having dampened expectations of an even lower deposit rate. In the medium term, EUR-USD should decrease again. Admittedly, the ECB did only cut the deposit rate by 10 basis points yesterday to -0.4%, but it took the markets by surprise with three decisions.
First, it raised the volume of monthly bond purchases from €60bn to €80bn – something which Draghi evidently wasn’t able to push through at the December meeting.
Second, it will in future also buy euro-denominated bonds from companies in the euro zone, as long as they have an investment grade rating. It is thus giving preference to larger companies over smaller entities, but in running this risk it is signalling its determination to relax the stance.
And third, it is offering commercial banks liquidity for the lengthy period of four years under the TLTRO programme. The more banks increase their lending to the real economy, the closer the interest rate on this tender will be to the negative deposit rate of -0.4%. In other words, commercial banks will be able for the first time to refinance business with the ECB at negative interest rates. The ECB Council has acted more boldly this time than in December, because it had stronger arguments for doing so. The ECB’s economists have after all sharply lowered their growth forecasts, above all for 2016, which they did not do in December.
The forecast for the core rate this year and next has also been cut substantially. This makes it unlikely that we will see further monetary easing in June – which we had hitherto been expecting. We remain doubtful, though, that the ECB billions will do much to help the real economy.
Lending: QE of little help An only limited efficiency of ECB bond purchases is suggested by the findings of the Bank Lending Survey, which indicates that fewer than 5% of the banks polled had relaxed their credit lines on account of the bond purchase programme (chart 2). Moreover, on average only one bank in seven certified to the ECB that it had also used the additional liquidity for lending purposes. The situation is marginally better but by no means rosy as regards lending rates.
Roughly one fifth of the banks surveyed said that they had offered better lending terms as a result of QE, such as lower interest charges (see chart 2). Hence it is not surprising that loan growth has not accelerated since the onset of bond purchases. One major reason for the moderately positive lending trend is evidently the continuing overhaul of the commercial banks’ balance sheets.