The ECB expands the injection of liquidity against the pandemic and opens up to more purchases

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The ECB expands the injection of liquidity against the pandemic and opens up to more purchases


The institution chaired by Christine Lagarde, has kept interest rates at current levels, as expected. That is, the main financing operations continue with a rate of 0%, the deposit facility rate at -0.5%, and the marginal facility loan rates at 0.25%. The main novelty in the statement from the Governing Council is in the announcements about the provision of liquidity to banks through auctions. On the one hand, the rounds already announced (LTRO III) between June 2020 and June 2021 stand at 50 basis points below the average rate of current operations, which assumes reaching -1%.

This is a further improvement over the announcement of the last meeting, on March 12, when the ECB reported these new rounds of refinancing with a maximum rate of -0.75%. In addition, the central bank has announced an additional pandemic liquidity auction program (PELTRO), which They will take place in seven auctions from May 2020, with staggered maturities between July and September 2021., in line with collateral or collateral relief measures that banks can use, such as including Greek debt, reducing the cut or also using bonds from companies that had an investment grade on April 7 but have lost it due to rating cuts during this crisis, which is known in the jargon like ‘fallen angels’.

These operations are “non-selective in nature to support liquidity conditions in the euro area financial system and help preserve the smooth operation of money markets by providing effective liquidity support,” the central bank statement said.

Another important message from the monetary authority is to open the door to expanding asset purchases. “The Governing Council is fully prepared to increase the size of the PEPP [de 750.000 millones] and adjust its composition [deuda pública y corporativa, sin las restricciones habituales], as much as necessary and for as long as necessary. In any case, you’re ready to adjust all your instruments, as appropriate, to ensure that inflation moves toward your target on a sustained basis [cerca pero por debajo del 2%]”

The purchases will continue until the eurozone leaves behind the crisis caused by the coronavirus pandemic and, in any case, at least until the end of 2020. Likewise, the body chaired by Lagarde stresses that it will continue to reinvest maturities for a period of time. longer beyond the date you decide to start raising interest rates. The Council anticipates that LTRO rates and the ‘price of money’ will remain at current “or lower” levels until inflation converges to 2%, which now seems far off. Analysts believe that this year there could be one or two additional cuts in the type of deposit facility, which implies a “fine” to the bank for its excess reserves to encourage credit.

In their previous meeting, on March 12, the ECB disappointed the market. On that occasion, it maintained rates at current levels, announced an extra package of asset purchases of 120,000 million for this year and its president, Lagarde said his job is not to prevent fragmentation between risk premiums. The immediate response from the market was sales of peripheral bonds, which led the French executive itself and other members of the ECB to qualify their words, and the institution announced a week later an additional $ 750 billion program to calm the fixed income market.

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