quinta-feira, 10 de março de 2016
5 takeaways on the ECB’s bigger bazooka
5 takeaways on the ECB’s bigger bazooka
From now on, the eurozone’s anti-crisis arsenal won’t rely on interest rates.
By PIERRE BRIANÇON 3/10/16, 8:01 PM CET
PARIS — In what sounded at times like a word-for-word repeat of past performances, European Central Bank President Mario Draghi tried yet again to convince financial markets that lower interest rates and a bigger and better quantitative easing program would help boost the eurozone’s inflation and its all-too-weak recovery.
But his loudest message was: This is as low as interest rates will get.
The ECB’s package of measures unveiled Thursday was bolder than most analysts had forecast and included steps to mitigate the impact of deeper negative rates on the banking industry’s profits.
As in the past, the euro immediately sank on the news. But it bounced back when Draghi said in his explanatory news conference that the ECB had done all it could in terms of lowering interest rates. Even though the value of the euro is not a main target of the central bank, a weaker eurozone currency would help push up inflation.
The misunderstanding between the ECB and foreign exchange markets is not new. Still, the euro — which is up almost 4 percent against the dollar since the beginning of the year — is a sign of the strong headwinds the ECB is facing.
Here are five other major implications of the ECB’s latest action:
1. Lower for longer, more and (maybe) better
The main reason for Thursday’s rather aggressive decision is that forecasts for both growth and inflation in the eurozone are much worse than when the ECB’s governing council last met in December.
The ECB now sees inflation at 0.1 percent this year (three months ago, the forecast was 1 percent) and 1.3 percent in 2017. The goal of reaching the official target of “levels below, but close, to 2 percent” seems to get more elusive by the month.
To boost inflation, the central bank as expected went deeper into negative territory by taking the interest rate on its so-called “deposit facility” (what banks use to park their excess reserves overnight at the ECB) to -0.4 percent, from -0.3 percent. This is in theory supposed to lower short-term interest rates and push banks to use their reserves in other, more productive ways — like lending.
What wasn’t expected was that the ECB also cut its main refinancing rate (the rate at which banks borrow from it) to 0 percent from its current, historically low 0.5 percent. That should also help bring overall rates lower, and cushion the blow for banks.
Expanding the asset-buying program (“quantitative easing”) from €60 billion to €80 billion a month is also an aggressive step, especially as the ECB decided to expand the scope of securities it would buy on the market. It will now purchase corporate bonds as well as government ones, which will remove the risk that the central bank might soon run out of eligible assets to buy.
2. Message to the banks: we care but stop whining …
Eurozone banks and industry lobbyists have started complaining about the risks posed by negative interest rates to lenders’ profitability. ECB officials in recent weeks had indicated that they were not tone deaf and were conscious of the risks. “The governing council is increasingly aware of the complexities this measure entails,” Draghi acknowledged. But ECB Vice President Vitor Constancio denied on Thursday that “on the aggregate level,” negative interest rates hurt banks. His explanation: first, lower interest rates have pushed down the cost of bank’s funding; second, they helped the economic recovery and thus the banking system; and third, they have boosted the value of the bonds banks hold in their portfolios through capital gains.
The overall benefit, however, can’t hide the fact that, as Draghi said, banks in the monetary union face totally different market conditions and national regulations. This means some of them are hurt by the difficulty of passing on negative interest rates to their own customers (who could always opt for cash, if charged for their deposits). So even if the banking system’s aggregate profitability hasn’t been hurt so far, “it won’t be true forever,” the ECB president admitted.
3. … and start lending more
Credit conditions have improved in the eurozone along with the economic recovery, but the ECB wants to go further. It will launch a second wave of “target long-term refinancing operations” — cheap money that eurozone banks will be able to borrow over four years, with interest rates reduced in proportion to the money actually lent to businesses. That, too, should help soothe the banking sector’s concern as the first wave of refinancing operations were deemed a success. Without giving an estimate, Draghi said he expected a “significant” uptake from the banks for ‘TLTRO II,’ which would contribute to unclogging credit channels in economies that need it most.
4. Nearing the end of the monetary road
“From today’s perspective, we don’t anticipate it will be necessary to reduce rates further:” That sentence seemed to spook foreign exchange markets, which seized up on fears that the ECB had run out of measures, even though Draghi also said he saw interest rates remaining “very low for a very long time” and way beyond the planned end of quantitative easing in 2017.
Draghi protested that the ECB had not exhausted its anti-crisis arsenal but said that from now on, the bank would rely on “other tools” than interest rates — namely, asset purchases — to help the recovery along. He denied that the ECB governors had ever debated, let alone considered, a “helicopter money” policy of directly financing corporations and households that some economists are advocating. He only said it was an interesting academic idea.
Considering the tensions provoked by QE in the first place, it’s unlikely that the ECB would ever go down this route. But as Draghi himself said on another topic (that is, interest rates), “new facts could change the outlook.”
5. Draghi’s answer to critics: what if we hadn’t acted?
Draghi was spared the negative vote on Thursday of Bundesbank President Jens Weidmann, the ECB’s chief hawk who has acted as leader of the opposition to his colleague’s policy in the last four years. Under rotation rules in the governing council, Germany didn’t get to vote this time. At the press conference, the ECB president used German to characterize the slogan of those who have opposed his policies: “nein zum allen” (“no to everything” or a do-nothing policy). Where would we be today if we hadn’t acted, he asked, before answering his own question: in a state of “disastrous deflation.”
That general truth, however, leaves room for a more nuanced appreciation of the tensions and oppositions that have surfaced in recent months within the ECB. The negative interest policy, for one, has been a source of unease for even some of the supporters of the Draghi line. If the ECB keeps finding it difficult to fulfill its only legal mandate — an inflation rate near to 2 percent — and must devise ever-more imaginative ways to reach its goal, policy differences within its executive board and governing council will surely move beyond the old hawks/doves division.