ECB keeps rates on hold, but announces QE and liquidity auctions

The European Central Bank kept all its main interest rates unchanged, a negative surprise for some analysts, but announced a raft of measures of new financing measures.

At the presser following the announcement, ECB chief, Christine Lagarde, also pointedly called for an "ambitious and collective" fiscal response in the Eurozone.

Thus far, only €27bn of government spending, which was equivalent to 0.25% of the euro area's gross domestic product, had been committed.

What she feared, Lagarde said, was the "complacency" and glacial response time of fiscal authorities in the single currency bloc.

The ECB's response was therefore designed assuming that the appropriate measures were put in place over the coming weeks, not months, she added.

New financing measures

In its policy statement, the ECB said that its liquidity auctions, known as targeted long-term refinance operations or TLTRO III, would be conducted at an especially low rate of up to 25 basis points below the average on its deposit facility rate for those lenders that kept credit flowing.

TLTRO III would run for 12 months starting from June 2020.

As a bridge measure until then, the ECB would conduct LTROs in order to provide immediate financing to lenders.

Lagarde said it was a "decisive" move that would provide "unlimited and generous" access to liquidity with much more attractive financing targeted at small and medium-sized enterprises.

On top of that, the monetary authority pledged an additional €120.0bn of asset purchases until the end of 2020.

"In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty," the ECB said.

All the main interest rates, those for its main refinancing operations, marginal lending facility and the deposit facility meanwhile were unchanged, at 0.0%, 0.25% and -0.50%, respectively.

Financial markets had been anticipating a 13 basis point cut in the ECB's key policy rates, although not all analysts believed that measure would have much of an effect.

During her presser, and in response to a question regarding Italian sovereign debt, Lagarde also indicated that the ECB was not there to address risk premiums in some government bonds.

But according to Erik Nielsen at UniCredit, those remarks were poorly worded given that the spreads impact on the transmission mechanism for the ECB's policy decisions.

Analysts react

"While these measures are pretty substantial, we do not think the ECB will be able to change investor sentiment any more than the Fed could last week," said Andrew Kenningham, chief Europe economist at Capital Economics.

"What matters for the economy is the trajectory of the virus itself and the measures which national authorities take to contain it. The most that can be achieved by economic policy is to soften the blow and (hopefully) prevent the downturn from morphing into a financial sector or sovereign debt crisis."

"The outcome surprised financial markets which had fully priced a 10bps reduction, although economists were more divided on whether lower rates would make that much difference in the fight against economic risks from Covid-19," chipped in analysts at Lloyds Bank.

Pantheon Macroeconomic's Claus Vistesen was very critical, saying: "Trichet's ill-time rate hikes in 2011 are a clerical error compared with today's disaster.

"Sometimes you're just dealt a bad hand. The ECB came into this meeting with volatility and fear dialled to a max; that isn't easy. That being said, today's performance will go down as a catastrophic failure by part of the ECB. It is one of the world's largest central banks, and today markets were crying out for a backstop."