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ECB left rates unchanged as expected in September with controversial Christine Lagarde at the helm. The bank left deposit facility interest rates at -.50% and held steady rates on the main refinancing operations and on the marginal lending facility unchanged. Sees risks clearly tilted to the downside

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The European Central Bank announces its monetary policy decision for September 2020

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

Highlights

  • ECB will carefully assess incoming information, including pandemic and prospects for vaccines and developments in the exchange rate
  • New round of forecasts in Dec will allow a thorough reassessment of the economic outlook and balance of risks
  • Says risks clearly tilted to the downside
  • On bases of Dec assessment, ECB will recalibrate its instruments as appropriate
  • Repeats that rates to remain at present or lower until it has seen inflation outlook robustly converge to a level sufficiently close to but below 2% within its projection horizon and such convergence has been consistent
  • Repeats that PEPP purchases will continue until at least June 2021
  • Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion

NB LTRO (Targeted Longer-Term Refinancing Operations) is best described as a long term loan to banks to increase loan creation. The banks lend above a specified benchmark and borrow from the ECB at a negative rate. This will provide an incentive for the banks to lend and thus increase private spending in the economy. That's the theory clearly has not been a great success so far.

Full statement by the ECB: October 29 2020

In the current environment of risks clearly tilted to the downside, the Governing Council will carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate. The new round of Eurosystem staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks. On the basis of this updated assessment, the Governing Council will recalibrate its instruments, as appropriate, to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery and counteract the negative impact of the pandemic on the projected inflation path. This will foster the convergence of inflation towards its aim in a sustained manner, in line with its commitment to symmetry.

In the meantime, the Governing Council of the ECB took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council 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% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

(2) The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,350 billion. These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy. The Governing Council will conduct net asset purchases under the PEPP until at least the end of June 2021 and, in any case, until it judges that the coronavirus crisis phase is over. The Governing Council will reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

(3) Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year. The Governing Council continues to expect monthly net asset purchases under the APP to 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 Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

(4) The Governing Council will also continue to provide ample liquidity through its refinancing operations. In particular, the third series of targeted longer-term refinancing operations (TLTRO III) remains an attractive source of funding for banks, supporting bank lending to firms and households.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

Webcast – 14:30 CET

Alternate player (audio: en,fr,de) Watch on Twitter @ECB

Live. https://www.ecb.europa.eu/home/html/index.en.html

Source: Euopean Central Bank

From The TradersCommunity Research Desk

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