At yesterday’s meeting of the Governing Council of the European Central Bank, ECB representatives resolved upon a number of measures to ensure that financial parameters remain favorable for the foreseeable future. The forward guidance for the development of interest rates was modified to the extent that the key refinancing rate will remain at its level at least until the end of this year – whereas up until now an increase in the autumn had been indicated. As we expected, ECB representatives launched a new series of Targeted longer-term refinancing operations (TLTRO III). This new long-term tender program is to be offered on a quarterly basis over the period September 2019 to March 2021. The TLTRO III will have a term of two years in each case; the rate of interest payable will depend on the key refinancing rate. Just like the existing TLTRO II, the new tenders will feature built-in incentives that have not been specified in more detail, but will be less favorable overall. The ECB will not provide further detail on the new long-term tender operations until a later point in time. Another striking development is that the ECB intends to persist with its policy of full allotment for regular tender operations until at least March 2021. Last but not least, the ECB stressed that it would continue re-investing the liquidity from maturing securities in its APP portfolio for an extended period of time. When viewed in overall terms, the central bank is increasing monetary stimulus with this package.
Above all, the sharp downgrading of economic and inflation projections for the current year is likely to have motivated the Eurozone’s currency guardians to implement this comprehensive package of measures. For 2019, ECB staff are now reckoning on GDP growth of just 1.1% (previously: 1.7%) and an inflation rate of 1.2% (previously: 1.6%). At the same time, however, it should be noted that senior ECB figures continue to anticipate a pickup in economic growth over the coming years – the GDP projections for 2020/21 remain largely unchanged, for example. Moreover, ECB representatives continue to expect a moderate increase in price pressure in the medium term. Despite the fresh stimulus announced yesterday, the currency guardians appear to have not yet given up hope of a normalization of monetary policy.