European Central Bank monetary policy decision - 12 September 2019

  • Prior decision
  • Main refinancing rate 0.00%
  • Marginal lending facility 0.25%
  • Deposit facility rate -0.50%
  • Announces rate tiering system
  • To introduce two-tier system for negative rate policy
  • Reintroduces QE, €20 billion per month from 1 November
  • Says to buy bonds as long as needed
  • To stop purchases shortly before raising rates
  • Modalities of TLTROs will be changed
  • Sees rates at present or lower levels until inflation outlook robustly converges to central bank's aim

Overall, the decision here looks to be a weak one in terms of what markets are expecting. But the fact that QE is being reintroduced is giving bond buyers something to chew at (although it is just €20 billion per month). In my view, that's not good enough.

I mentioned before this is a "go big or go home" kind of event and this is about as soft as it gets for the ECB. The market may be adjusting to the more dovish decision here but in time, this may not be viewed as good enough to drive back economic growth and bolster inflation expectations in the long-run.

In any case, the euro is weaker now after a whipsaw on the decision with EUR/USD back under 1.1000 while bonds are surging on the QE announcement. Meanwhile, equities are higher as well - bank stocks in particular - as the ECB provides some relief via rate tiering.

The full statement by the ECB:

At today's meeting the Governing Council of the ECB took the following monetary policy decisions:(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.(2) Net purchases will be restarted under the Governing Council's asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.(3) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem's main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks' holdings of excess liquidity will be exempt from the negative deposit facility rate.Separate press releases with further details of the measures taken by the Governing Council will be published this afternoon at 15:30 CET.The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.