ECB ramps up stimulus, shifting from negative rates to QE and CE

In a bold move, the ECB announced a significant package to ease monetary policy as updated staff macroeconomic forecasts showed that the inflation outlook had materially deteriorated since December. The measures presented exceeded expectations, but the decision to shift the focus from rate cuts to quantitative and credit easing failed to convince markets that yesterday closed in negative territory.    

The ECB bazooka
The ECB announced three main measures:
– First, the ECB announced a cut in all the policy rates: the refi rate was cut by 5bp to 0%; the depo rate by 10bp to -0.4% (in line with our and the market’s expectation); and the marginal lending facility rate by 5bp to +0.25%. "Although we think the cut in the refi and the marginal rates are mostly symbolic, it shows the ECB’s commitment to comply with its mandate and its willingness to surpass market expectations – Barclays comments the measure – However, President Draghi said that the Governing Council rejected the introduction of a tiered system for the deposit facility, due to the complexity of such a system, and because it did not want to signal that further cuts were coming".  

-Second, the monthly purchases under the asset purchase programme will be expanded from EUR60bn to EUR80bn and non-bank euro denominated investment grade corporate bonds will be included in the list of assets eligible for regular purchases. Some other technical changes to QE were also introduced. These go beyond Barclays's expectation of an extension to semi-public bonds and a possible small increase in the amount of purchases. It adds c. EUR580bn to the pool of eligible assets, which will quickly be offset by the higher monthly pace of purchases. 

– Last but not least, a new series of TLTROs (TLTRO II) will be launched, each with a maturity of four years, starting in June 2016. The ECB also reduced the interest rate on the new TLTROs which “may be as low as” the depo facility (-40bp). The expansion of QE and the TLTRO II convey the willingness of the ECB to shift the focus of its easing stance from rate cuts (and therefore weaker euro) to credit easing measures. The impact of such measures will probably take a longer time to materialize but should be more efficient in the medium term than relying on exchange rate depreciation. "Consequently – Barlays says – we have removed our forecast of another depo rate cut from our baseline".