European Central Bank adds to dovish central bank chorusContributors Karen Ward, Ambrose Crofton, Global Markets Insights Strategy Team
Following a significant pivot from the US Federal Reserve in recent months, today the European Central Bank (ECB) followed suit by providing ongoing liquidity support to the eurozone’s banks. Key policy rates were also left unchanged, but it changed its forward guidance such that rates will remain at their current levels at least through the end of 2019 (previously announced as past summer 2019).
Given markets already expected rates to be on hold through this year, the more significant news is the extension of the liquidity the ECB provides to the banking system via its Targeted Longer-term Refinancing Operations (TLTRO). The TLTRO initiative was initially announced in 2014 and is an over EUR 700 billion programme to incentivise eurozone banks to lend to non-financial corporations and households, by lowering the banks’ marginal funding costs. These loans, of which Italian and Spanish banks hold 60% of the total value, would have started maturing in June 2020, and so the announcement of a new two-year TLTRO initiative should help prevent liquidity conditions from tightening, particularly in the periphery. Whilst these loans may be aimed at encouraging lending to the private sector, the additional liquidity is also likely to support the government debt markets. One of the big beneficiaries of today’s announcement has been the Italian government bond market.
EXHIBIT 1: European Central Bank staff macroeconomic projections for the euro area
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