The ECB announcements were broadly in line with expectations in terms of rate cuts (a 10bp reduction in the deposit rate and a signal of more to come) and mitigating measures for banks (more generous TLTRO conditions and a tiered deposit rate system). The restart of net asset purchases was a mixed bag, as the size was relatively modest (EUR 20bn per month), but the programme is open-ended for the first time since the ECB launched the APP. The ECB said the programme would last as ‘long as necessary’.
Despite the open-ended nature of the programme, the size of the QE programme is very small and, as such, the macroeconomic impact of these measures will be relatively modest. As such we doubt whether this package of measures will be sufficient to raise inflation significantly over the next 2-3 years. Given this, and the modest pace of net asset purchases, QE will likely last for the foreseeable future, and a step up in the pace looks likely at some point.
Government bond markets are rallying strongly suggesting that they had largely priced out a restart of QE in the run-up to the decision.
We will revert with a more detailed analysis later this afternoon. (Nick Kounis)