ECB surprisingly eases monetary policy further, cuts interest rate on TLTRO III by 25 bps

The ECB surprisingly eased its monetary policy further today. The central bank cut the interest rate on its targeted longer-term refinancing operations (TLTRO III) by 25 basis points. Therefore, the interest rate for banks that meet the ECB's requirements for lending to the real economy will be only -1.0% from June onwards. Also, the European Central Bank introduced “pandemic emergency longer-term refinancing operations" (PELTRO) with an interest rate of -0.25 percent.

The ECB is expected to increase the volume of the PEPP purchase program, said Commerzbank in a research report. The central bank is expected to have used up the previous volume of EUR 750 billion as early as the autumn anyway, if it continues to purchase at the current pace. Furthermore, the ECB is expected to decide in the end to purchase Italian government bonds even if they were threatened to move to the junk sector.

An additional easing of monetary policy would be consistent with the ECB’s previous pattern of behavior. ECB has been demanding reforms for some time and, in the event of a crisis support programmes. However, when politicians could not deliver and the markets grew nervous, the ECB regularly stepped in to help politicians, noted Commerzbank.

“But despite the basic decision in favour of such a programme, we do not expect the countries to agree on financing on this scale. In fact, a doubling of the contributions to the EU budget would be necessary so that the EU Commission would have sufficient collateral to finance such a reconstruction programme via AAA-rated EU bonds. If, as we expect, the countries do not come to an agreement in the foreseeable future, pressure will quickly mount again on the bond markets, which should prompt the ECB to step in”, added Commerzbank.