Coronavirus » ECB boosts measures to support liquidity and funding conditions

Following the meeting of the Governing Council held today, Lagarde announced key measures the central bank will follow to contain and reduce the crisis’ affect on Euro areas, as she enhanced the “sharp contraction in economic growth and profound deterioration on the market.”

The ECB’s new and revised approach focuses on reinstating the Euro’s GDP as a result of macro-economic projections that enhanced the growth scenarios by the ECB falling by five to 10 percent this year – followed by “the recovery and normalisation of growth.”

Decrease of interest rate on TLTRO III

The targeted long-term refinancing operations (TLTRO III), which offers long-term funding to banks, will have its interest rate reduced from the period of June 2020 to June 2021 to 50 basis point below average interest rate on Eurosystem’s key financing operations on the same period. This shows the central bank’s ambition to push bank lending into the real economy.

For counterparties, Lagarde ensured the interest rate will be “50 basis point below average deposit facility rate” prevailing over that period.

Non targeted non pandemic long-term operations

The ECB’s president said it will provide new non-targeted pandemic emergency longer-term refinancing operations (PELTROs) “to support liquidity condition in the euro area” – preventing “liquidity backstop.” These will be launched May 2020.

Emphasis on PEPP

Lagarde stated that Purchases conducted under the Governing Council’s Emergency Purchase Programme (PEPP) since end March resulted in a €750bn envelop, would ease the “overall monetary policy stands and counter severe risk of monetary policy mechanism”, along with the “outlook of the euro area posed by the coronavirus.”

She stressed the purchases will continue to be conducted until the Governing Council deemed the coronavirus period to be over, as the EPP remains “one huge component” of the ECB’s measures.

Key ECB interest rate

The KEY ECB interest rate will remain unchanged and should be expected to “remain at their present level unless inflation outlook converges to level close to but below two percent,” Lagarde added.

Net purchases under asset purchase programme (APP)

The ECB announced it will pursue its monthly pace of €20bn regarding the net purchases under APP, along with the purchases under the €120bn “temporary envelope” until the year end.

Reinvestment of principal payments from maturing securities purchased under the APP will also be continued by the ECB in full for an extended period after the Governing Council raises key ECB interest rates again.

ECB reiterates unpredictability of pandemic

The Governing Council’s decisions showed its strong initiative to support liquidity and sustain the flow of credit to both firms and households amid pandemic, stating it will “provide support to affected companies, workers, and households,” through “joint and coordinated policy action to guard against downside risks” – safeguarding the medium price stability.

The ECB’s new measures are aimed at improvising current liquidity and funding conditions to preserve the “smooth provision of credit to the real economy,” said Lagarde.

These also showed great focus on containing inflation, as Lagarde warned that “headline inflation is likely to decline further,” and highlighted the “negative effects of underlining inflation” over the coming months.

She reiterated that the Governing Council “remains fully committed to doing everything necessary with its mandate to support all citizens” during these times – “to all parts of the economy, to all jurisdictions” in “pursuit of our price stability mandate.”

Despite the European bank’s promise of recovering economic activity,” the ECB’s president acknowledged that “speed and scale remain highly uncertain,” and insisted that “the medium-term impact of inflation is surrounded by high uncertainty.”

Whilst governments and central banks work jointly to preserve economies, the outcome of these decisions will depend on the duration and success of containment measures across the globe.

Amid its announcement, Lagarde stressed that the current pandemic’s priority was to ensure the safety of lives and containment of the disease as she shared the ECB’s deepest gratitude to doctors and nurses on the front line.

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