The ECB will inject more liquidity and maintain rates


Mario Draghi appeared at a press conference explaining the new projections of the ECB and the measures it will take. In his statements, he stressed that he will maintain interest rates at current levels and will also inject more liquidity into the market.

Economic expansion has weakened and growth has moderated. Our colleague Francisco Coll already advanced it in his last article on growth prospects. At the rate that global risks became more and more present, the GDP of the Eurozone has lost steam.

The latest statements by the President of the European Central Bank (ECB) make it clear that they are not speculation. The economic slowdown is present and Europeans must weather it as best we can.

Specifically, the ECB has published four measures to combat the slowdown:

  • Interest rates remain unchanged.
  • The ECB will continue to reinvest the principal of the securities acquired in the asset buyback program.
  • A new liquidity injection program called LTRO-III.
  • The Eurosystem's credit operations will continue as before.

Unchanged interest rates and reinvestment

From the first two measures, clear conclusions can be drawn. On the one hand, it was clear that the European Central Bank (ECB) could not consider raising rates (restrictive monetary policy) in an environment of deceleration. It would not make sense. More if possible, when the ECB has continued to apply a very expansionary monetary policy even when the economy began to grow.

  • OPF interest rate: 0%
  • Marginal credit facility: 0.25%
  • Deposit facility: -0.40%

The withdrawal of stimuli must be gradual, and given the fragility of the economies at present it cannot be carried out in a hasty manner. It was something that analysts had already been indicating. The withdrawal of stimuli had and has to take place, but it will not be overnight.

On the other hand, in addition to maintaining interest rates, Mario Draghi has indicated that the ECB will continue to reinvest the money from the assets of the asset purchase program. In other words, once it expires, it will buy back the assets it has been buying to stimulate the economy. And not only that, but it will continue to do so for a long time as long as it is needed.

New liquidity injections: TLTRO-III

One sign that Europe is not doing as well as it would like is the publication of a new stimulus program. In other words, more expansionary monetary policies.

In essence the TLTRO-III that comes from the acronym in English Targeted Longer-Term Refinancing Operations. In other words, speaking clearly and in Spanish, they are longer-term refinancing operations that are aimed at a target audience. Who is that target audience? Companies and families. That is, the ECB makes this injection of liquidity to the banks, on the condition that the credit goes to the real economy.

In exchange for the credit to flow to the real economy, they get better conditions. That is, a higher maturity and a lower interest rate. And, therefore, they differ from the basic loans that the ECB offers to banks.

As if all this were not enough, the auctions through which credit is granted to the Eurosystem will be fully awarded. In other words, credit will continue to be provided to banks. All with the goal of keeping the economy flowing.

The Euro weakens against the dollar

The EUR / USD pair suffered a drop of just over 1% during the day, thus registering its biggest drop so far this year.

In this way, the downward trend that had been occurring throughout 2018 continues. In other words, the dollar strengthens and the euro weakens. Something that is not surprising when we look at the panorama.

  • Federal Reserve (FED): Tight monetary policy
  • European Central Bank (ECB): Expansive monetary policy

Guide to the effect of monetary policy on Forex

With this in mind, and as long as investors' perspectives do not change, it is easy to think that the euro will continue to devalue against the dollar. Furthermore, many investors are fleeing the euro for fear of a further slowdown.

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