ECB Enhances Stimulus

September 12, 2019

Policymakers at the European Central Bank as expected cut the deposit rate by 10 basis points to minus 0.50%, announced an open-ended asset purchase program to start in November at EUR 20 billion per month, said targeted LTRO operations will carry the average deposit rate, and introduced a a 2-tiered system of reserve remuneration in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate. The rate cut was the first in more than 3 years. The earlier experience with quantitative stimulus through bond buying only ended at end-2018 and created EUR 2.6 trillion of liquidity. Inflation has stubbornly remained well under target, and growth risks in the common currency area have become increasingly skewed in a downward direction as underscored by July industrial production data released earlier today. What stands out in today’s decision to ease monetary policy is that no specific data has been placed upon when the stimulus will start to be reined in. Outgoing ECB President Draghi will be stepping down on a “however long it takes and whatever it takes” note. His commitment to raising inflation back to target gives his successor, Christine Lagarde, maximum flexibility.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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