The central bank’s quantitative easing (QE) program will entail 20 billion euros ($21.9 billion) per month of net asset purchases for as
long as it deems necessary.The ECB also cut its main deposit rate by 10
basis points to -0.5%, a record low but in line with market
expectations.
It now expects interest rates to remain at their present or lower levels until it has seen its inflation outlook “robustly converge to a
level sufficiently close to but below 2% within its projection horizon,
and such convergence has been persistent.”
In a press conference following the decision, ECB President Mario Draghi urged governments to take fiscal measures to supplement the
central bank’s monetary stimulus and reinvigorate the euro zone
economy.“In view of the weakening economic outlook and the continued
prominence of downside risk, governments with fiscal space should act in
an effective and timely manner,” Draghi said.
“In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic
stabilizers to operate freely. All countries should reinforce their
efforts to achieve a more growth-friendly composition of public
finances,” he added.Additionally, the ECB changed its TLTRO (targeted
long-term refinancing operations) rate to provide more favorable bank
lending conditions and match that of its refinancing rate, erasing a
previous 10 basis point spread.
A new system will see borrowers receive preferential rates if their eligible net lending exceeds a benchmark, providing an incentive for
banks to use that money.
In line with market expectations, the ECB also introduced a two-tier rate system, a measure encouraged by the heads of various major
European banks during the latest earnings season. The move is intended
to alleviate some of the pressure of negative interest rates on the
balance sheets of European banks, which have seen profits squeezed by
the persistent low rate environment.Draghi added in his press
conference: “In order to support the bank-based transmission of monetary
policy, the Governing Council decided to introduce a two-tier system
for reserve remuneration, in which part of banks’ holdings of excess
liquidity will be exempt from the negative deposit facility rate.”
