ECB Cuts Rates From Nada to Zilch (and Less), Announces QE
In his Jackson Hole speech, Mario Draghi already hinted at further ECB interventions, pointing out that 5 year forward inflation breakevens indicated that long term inflation expectations had fallen below 2% (i.e., 2% CPI rate of change). Consumers would of course see this as a reason to rejoice, but not our vaunted planners. It was already widely expected than an ABS purchase program would eventually be announced, as preparations for this have been underway for several months.
Frankly, we thought that given that the TLTROs are beginning in September, the ECB would likely wait for their impact before announcing additional interventionist steps. As it turned out, they announced so many things at once on Thursday, they actually managed to surprise not only us, but apparently the great majority of market participants.
The announcement included: further rate cuts; with the repo rate now at 5 basis points, which we might as well call zero, this avenue is now rapidly closing. Since all rates were cut, they also increased the bizarre penalty rate on excess reserves to minus 20 basis points. All this measure achieves is that it costs the banks money. It’s not going to make them more eager to lend, but it will lead to them cutting the paltry interest they pay to savers even further. So the war on savers is continuing at full blast.
As to these rate cuts, we would note that the central bank has been trying to “rescue†the economy with rate cuts for quite some time. It hasn’t worked so far, but that is of course not stopping them from doing more of what hasn’t worked. This may be properly called “central planning insanityâ€. Even so, it is not clear to us why they believe another 10 basis points can possibly make a difference. Even if one erroneously thinks that economic growth can actually be spurred by monetary pumping, this appears to be an utterly futile gesture.
More surprising was that the ABS purchase program was announced concurrently, and along with it a covered bond purchase program. In his press conference Draghi promised a “substantial increase in the ECB’s balance sheetâ€, which can actually be fairly easily achieved with this latter monetization initiative. Euro area covered bonds consist of two types, they are either backed by mortgage bonds, or by public sector debt securities (including agency debt). This is a big market, and there are very large covered bond programs out there, which can be used to add further to the already large supply of such bonds. Draghi pointed out that this will inject additional money directly into the economy.
