The ECB announced it will step up its net asset purchases by a cumulative EUR 120bn until the end of the year. This effectively means that net asset purchases will rise to around EUR 33bn per month from EUR 20bn currently. The ECB signalled that the increase will likely be focused on the private sector programmes. Meanwhile, the ECB loosened the conditions on its TLTRO programme. The lending rate can be as low as 25bp below the deposit rate, so effectively a 25bp cut (for banks that maintain their levels of credit provision). The maximum amount that banks can borrow will be raised to 50% of eligible loans, while the ECB will also explore collateral easing measures. The main surprise was that the ECB left its deposit rate unchanged at -0.5%.
We think that cutting the TLTRO rate and loosening the other programme conditions will be much more supportive of easier bank lending conditions than reducing the deposit rate. So the policy mix here makes sense. Having said that, the overall scale of the package, given that the economy is likely heading for recession is modest. As such, we think that further policy easing will follow. We think that the pace of net asset purchases will likely be stepped up further, while further reductions in the TLTRO rate may also now be the ECB’s preferred way to ease bank lending conditions. (Nick Kounis)