ECB fires up monetary stimulus

The news: The ECB has boosted its monetary easing programme through further cutting interest rates (the refinancing rate was lowered by 10bps to 0.05%, the deposit rate fell to -0.2% and the lending rate to 0.3%) and two quantitative easing programmes:
– under the ABS purchasing programme (ABSPP), the Eurosystem will purchase a broad portfolio of asset-backed securities (ABS) with underlying assets consisting of claims against the euro area non-financial private sector, as had been announced in the June meeting
– under a new cover bond programme (CBPP3) the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by banks and credit providing institutions domiciled in the euro area, it is the third time that the ECB will resort to this operation.

Both these operations will start in October and the details will be announced after the next ECB meeting.

At the press conference President Draghi has also announced that the ECB staff forecasts for growth and inflation in 2014 had been lowered to 0.9% and 0.6%, due to weaker than expected data in recent months. The ECB council hopes to counter these recent trends, along with subdued credit growth, with these measures.

Our comment: The ECB has shown again its strong commitment to boost euro area GDP growth and to avoid deflation. Not only through the measures announced today but also by stating that

Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate.

President Draghi had shown some concern in August that market expectations for inflation in the long run were drifting lower, suggesting that the ECB’s credibility was under threat.

The quantitative measures announced today have been designed to ease conditions for banks through the CBPP3 and households and firms through the ABSPP. The latter should help improve the functioning of the monetary transmission mechanism, i.e., the mechanism through which the ECB decisions effectively translate into higher credit for the economy, as the ECB will buy securities that are backed by credit that has effectively been given to households and firms.

However, the question remains why Europe appears to remain well behind the US and Japan and continues to find it difficult to shake-off the recession. Part of the reason may lie on fiscal tightening in many countries. Other important factors are probably related to the fact that the European economies lack the flexibility to grow quickly out if a deep recession. Monetary policy, however easy, will not be able to change that.