Kirkegaard, F. J. (2014) “The ECB Throws down the Gauntlet“, The Peterson Institute for International Economics, 05 September.
The European Central Bank (ECB) surprised financial markets on September 4 by announcing an interest rate cut of 10 basis points, a new program to purchase asset-backed securities (ABS) in the nonfinancial sector, and another round of purchases of covered bank bonds. The ECB was responding not only to the recent deterioration in the European economy and falling inflation but also to European governments.
The new measures are stronger versions of the ECB’s actions in June. The main interest rates are now at just 0.05 percent, and the deposit rate is at negative 0.20 percent. Mario Draghi, the ECB president, said the central bank’s interest rates are at rock bottom and will not be cut further, signaling to euro area banks that they should make full use of the ECB’s upcoming 4-year Targeted Long-Term Refinancing Operations (TLTROs) now and not wait for lower rates in the future. The ECB Governing Council also hopes that its latest measures will put further downward pressure on the euro exchange rate.
The ABS purchase program (ABSPP) had been preannounced in June but has now been given a new starting time in October with a potential expansion of the pool of eligible collateral.1 By adding on a third round of covered bond purchases, the ECB also expanded the pool of private assets they intend to purchase to include nonfinancial sector assets (mortgages, auto loans, leasing receivables, consumer finance loans, and credit card receivables backing ABS) and bank bonds. Draghi also made it clear that the ECB would buy only the senior tranches of ABS and would consider purchases of riskier mezzanine tranches “only if there is a guarantee.” As noted earlier by ECB executive board member Benoît Coeuré, the ECB will only begin taking on real credit risk if there are fiscal guarantees from European governments. This suggests that the ABSPP structure is designed to replicate the earlier Federal Reserve Term Asset-Backed Securities Loan Facility (TALF) program launched in 2008.2
Relevant posts:
- Fuertes Α.-Μ., Kalotychou , Ε. & Saka, Ο. (2014) “ECB Policy and Eurozone Fragility: Was De Grauwe Right?“, Economic Policy, CEPS Working Documents, 20 June.
- Magnus, G. (2014) “The ECB and Sisyphus: it won’t be finished unless it does QE“, Pieria Online, 09 June.
- Varoufakis, Y. (2014) “How should the ECB enact Quantitative Easing? A proposal“, Thoughts for the post-2008 World Blog, 19 May.