The ECB Governing Council kept interest rates unchanged, as expected after it cut the rates by 10bps (including the deposit rate to a negative level) at the previous meeting. As for the further path of interest rates, the ECB reiterated in the post-meeting statement its previous policy of forward guidance, that is the plan of keeping interest rates at the current level for an extended period of time. He did not clarify how long this might be and stated that the interest rate path would be determined by the inflation outlook (the latest projection assumed inflation at only 1.5% yoy in Q4'201 while the ECB target is slightly below the 2.0% yoy).
In a separate statement the ECB Council released the modalities for the targeted LTRO. The Council determined, among others, the limits of loans under TLTRO as well as the method of calculating the benchmarks of net lending to the non-financial private sector for each of the banks involved in the TLTRO (if a bank does not achieve its benchmark, it will be required to pay back its borrowings under the TLTRO program in full in September 2016). Importantly, the limit of loans for the entire TLTRO program has been set at EUR 1 trn. The operations will be carried out over the next two years (until June 2016) on a quarterly basis (the first two operations are scheduled for September and December 2014) and they will all mature in September 2018.
The Bank also announced today that from January 2015, it will meet every six weeks instead of every month and that it will begin to publish minutes.
Similarly as in the previous months, the ECB Council stated that it expects a prolonged period of low inflation, after which inflation is expected to gradually return to the ECB target. It was also reiterated that the Council is unanimous in its commitment to using also unconventional instruments, should it become necessary to cope with risks of too prolonged a period of low inflation.
What instruments can the ECB use? In our opinion one should certainly expect the implementation of the program of ABS purchases, which along with TLTRO is expected to improve the transmission mechanism of monetary policy. Mario Draghi did not outline the ABS purchase plan in any detail, suggesting that its implementation is still a very long way off. The ECB President claimed that the market for ABS is EUR 1.4 trn implying that the plans to buy ABS could increase the size of its balance sheet substantially.
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