Draghi Steers ECB to Rekindle QE with Rate Cut and Resuming Monthly Bond Purchases
Posted on 09/12/2019
The European Central Bank (ECB) slashed its deposit interest rate further into negative territory, spearheaded a fresh round of monthly bond purchases, and embarked on maneuvers to stimulate a sluggish eurozone economy. Under the out-going ECB President Mario Draghi, the central bank enacted a 10 basis point cut to the deposit rate that banks pay to park excess reserves with it – pushing the rate to -0.5%. Draghi said that low inflation was the main contributor for the 10 basis point cut.
Citing low inflation, the ECB would also start purchasing 20 billion euros a month worth of securities beginning November 1, 2019. Essentially, more sovereign debt will be monetized by the ECB.
The Governing Council of the ECB revealed a two-tier system for remunerating excess liquidity holdings. The system seeks to support bank-based transmission of monetary policy. The central bank announced that a portion of excess liquidity holdings exempt from negative deposit facility rate. This particular scheme to apply as of seventh maintenance period starting on October 30, 2019. The exempt tier will will be remunerated at the annual rate of 0%.
The ECB press release states, “The Governing Council of the European Central Bank (ECB) today decided to introduce a two-tier system for reserve remuneration, which exempts part of credit institutions’ excess liquidity holdings (i.e. reserve holdings in excess of minimum reserve requirements) from negative remuneration at the rate applicable on the deposit facility. This decision aims to support the bank-based transmission of monetary policy, while preserving the positive contribution of negative rates to the accommodative stance of monetary policy and to the continued sustained convergence of inflation to the ECB’s aim.
All credit institutions subject to minimum reserve requirements under Regulation ECB/2003/9 will be eligible for the two-tier system. The two-tier system will apply to excess liquidity held in current accounts with the Eurosystem but will not apply to holdings at the ECB’s deposit facility. The volume of reserve holdings in excess of minimum reserve requirements that will be exempt from the deposit facility rate – the exempt tier – will be determined as a multiple of an institution’s minimum reserve requirements. The multiplier will be the same for all institutions. The Governing Council will set the multiplier such that euro short-term money market rates are not unduly influenced. The multiplier may be adjusted by the Governing Council in line with changing levels of excess liquidity holdings. Any adjustment to the multiplier will be announced and will apply as of the following maintenance period after such decision is made. The size of the exempt tier is determined on the basis of average end-of-calendar-day balances in the institutions’ reserve accounts over a maintenance period.”