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ECB fired a bazooka yesterday by more-than-expected across-the-board easing, though the markets were not impressed. Instead, the stock markets faltered and the EUR/USD ended higher than before the stimulus was announced. Focus instead shifted to signs that the rates are near the lower-bound, suggesting this might be the end of the road for the ECB's 'whatever it takes' assurance.
The main refinance rate was lowered by 5bps to 0.0%, the deposit facility rate was pushed deeper into negative by another -10bps to -0.4% and the marginal lending facility was lowered by 5bps to 0.25%. The quantum of monthly purchases under the QE program will be expanded by EUR 20bn to EUR 80bn every month starting Apr16. Issuer and issue share limits were increased from 3% to 50%.
Investment grade non-financial corporate bonds were added to the pool of QE assets. A new series of four targeted longer-term refinancing operations (TLTRO II) was launched, with a maturity of 4 years to be run quarterly between Jun16 to Mar17. The lending rate here will be as low as the deposit facility rate i.e. negative.
"This further implies that the ECB will in fact pay banks to ensure that the funds reach the real economy and spur credit growth," noted DBS research note. ECB also lowered the inflation and GDP forecasts.
Inflation estimates were revised down to 0.1% in 2016, 1.3% in 2017 and 1.6% in 2018 (vs earlier 1% in 2016, 1.6% in 2017). GDP estimates were also lowered to 1.4% in 2016, 1.7% in 2017 and 1.8% in 2018, reflecting headwinds from a weakening Chinese economy and other EM countries.
Inflation, one of the key worries for ECB, continue to remain way below targets, with the weakness in energy prices dragging goods inflation to negative, while service sector pressures remain stable. Core inflation is relatively firmer but lost steam in Feb16.
"While the ECB has over-delivered yesterday, the impact on inflation and inflationary expectations will be negated by the low commodity price backdrop and an only gradual pickup in demand conditions," explains DBS.
