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Draghi Era At ECB Ends With A Bang

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The outgoing European Central Bank President Mario Draghi announced on Thursday a host of stimulus measures to boost the euro area economy, in the final rate-setting session of his eight-year long tenure at the helm of the central bank of the 19 countries having euro as their currency.

The central bank slashed the deposit rate by 10 basis points to -0.50 percent, while it left the main refinancing rate and the marginal lending rate unchanged at 0.00 percent and 0.25 percent, respectively.

The deposit rate turned negative first in June 2014.

Almost all the stimulus measures announced by the ECB were in line with market expectations.

The bank also significantly changed the wording of its forward guidance and said "The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics."

The ECB restarted its asset purchase programme, or APP, which it had previously ended in December 2018. The bank said it will make monthly asset purchases of EUR 20 billion from November 1.

The new APP will "run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates," the ECB added.

The bank will continue to reinvest the proceeds from maturing securities purchased under the APP for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

The central bank also changed the terms for its new TLTRO-III loans, announced in March, to preserve favorable lending conditions, ensure smooth policy transmission and to support the accommodative stance of monetary policy.

The maturity of the loans under TLTRO-III were extended to 3 years from 2 and the interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem's main refinancing operations over the life of the respective TLTRO.

The TLTRO-III operations are set to begin in September.
To make the loans more attractive and to boost actual lending, the ECB said banks whose net lending exceeds a benchmark can avail TLTRO-III loans at a lower rate, and the rate can be as low as the average interest rate on the deposit facility prevailing over the life of the operation.

As widely expected, the ECB also introduced a tiering system for reserve remuneration. Under the new two-tier system part of banks' holdings of excess liquidity will be exempt from the negative deposit facility rate.

Draghi is set to hand over the reins to the outgoing International Monetary Fund Managing Director Christine Lagarde on October 31. The former French finance minister is set to inherit a host of unconventional policy measures the effectiveness of which are increasingly being doubted now.

The ECB had ended its massive EUR 2.6 trillion Asset Purchase Programme, which began in 2015, in December.

Eurozone interest rates were raised last in July 2011 by 25 basis points and Draghi is set to be the only ECB chief thus far who did not raise interest rates.

The Italian economist also raised several eyebrows as he was bold enough to undertake several unconventional measures at the ECB, mainly asset purchases and negative interest rates, which were inconceivable in the euro area few years ago.

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