The European Central Bank (ECB) left its key interest rates steady but launched another emergency funding operation to support liquidity in the financial system and lowered the interest rate on one of its existing long-term funding operations at a time most economic activity worldwide has ground to a halt.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” said ECB President Christine Lagarde, estimating the economy of the 19-nations that share the euro currency could shrink between 5 percent and 12 percent this year depending on how long measures to contain the coronavirus remain in place and the success of policies to ease the economic consequences.
The ECB, which has already cut interest rates to the lower bound, lowered the interest rate on its targeted longer-term refinancing operations (TLTRO III), which was launched in March, to 50 basis points below the average rate on refinancing operations during the period from June 2020 to June 2021.
And for financial institutions whose lending to businesses reach the ECB’s threshold, the interest rate will be even lower, at 50 basis points below the ECB’s deposit rate.
The ECB has maintained its benchmark refinancing rate at 0.0 percent and the lending rate at 0.25 percent since March 2016 but in September 2019 it lowered the deposit rate to minus 0.50 percent.
Lagarde confirmed the ECB’s guidance the interest rates will remain at their present or lower levels until inflation “robustly” converges to a level that is sufficiently close to, but below 2 percent.
In addition to its new funding program, the ECB’s governing council said it would continue to purchase assets at a monthly pace of 20 billion euros under its asset purchase program (APP) along with a temporary 120 billion envelope until the end of the year.
It also confirmed that it expects these asset purchases to run for as long as necessary and only end shortly before its starts raising key interest rates.
In March the ECB launched a 750 billion euro Pandemic Emergency Purchase Program (PEEP) to help ease its overall monetary policy stance and counter the risk to its monetary policy transmission and the outlook for the euro area economy.
Today the ECB launched another program to boost liquidity in the euro area financial system that will be known as PELTRO (non-targeted pandemic emergency longer-term refinancing operations).
PELTROs comprise seven additional refinancing operations that begin in May and then mature in staggered sequence between July and September 2021, The operations will be carried out as fixed tenders with full allotment with an interest rates that is 25 basis points below the refinancing rate.
The ECB said it was fully prepared to increase the size of the PEPP program “by as much as necessary and for as long as needed.”
“In any case, it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” ECB said.
Lagarde said the pandemic and containment measures had taken a toll on production and domestic demand in the euro area and the downturn in April activity suggests the impact is “likely to be even more severe in the second quarter.”
“Given the highly uncertain duration of the pandemic, the likely extent and duration of the imminent recession and the subsequent recovery are difficult to predict,” she said, pointing to initial estimates by staff – ahead of a June forecast – that see gross domestic product falling by between 5.0 percent and 12 percent in 2020.
Inflation in the euro area has also been falling in recent months and fell to 0.4 percent in April from 0.7 percent in March, and the ECB expects its to decline even more in coming months due to the lower prices of oil along with the impact of lower economic activity.
The European Central Bank released the following statement on its policy decision followed by the introductory statement to the press conference by its president, Christine Lagarde:
