The European Central Bank just announced three new measures to boost lending. Here's how they'll work

Peter Spence
Follow Peter
Draghi unveiled a total of five measures to support the Eurozone (Source: Getty)

On top of the two policy changes announced earlier, the European Central Bank (ECB) is introducing a few more measures to prop up the ailing currency area.

We've already heard, from an official statement, that the central bank is cutting its refinancing and deposit rates, taking the latter into negative territory.

During a press conference, ECB president Mario Draghi has also unveiled three further policy tools. Credit Agricole's Frederik Ducrozet tweets that it is a "huge ECB package" that "goes beyond very dovish expectations, and has a good chance to work."

On top of those, Draghi has said that "if required, further monetary policy easing is possible". He reports that the governing council of the ECB is unanimous in "commitment to using also unconventional instruments within its mandate".

That's included prepatory work related to the "outright purchases of asset-backed securities", i.e. the ECB has been doing a lot of thinking about the introduction of quantitative easing.

Societe Generale's Kit Juckes says "the jist is that he is doing everything short of full QE to support the economy, and that will be reflected in stronger asset prices generally ... and the carrot of full QE is still dangling in front of us".

"For the economy, the underlying concerns remain," says Juckes, "fiscal policy is still tight, banks are still cautious, borrowers still even more cautious. No reason to change growth forecasts."

Targeted Long Term Refinancing Operations (TLTROs)

The ECB is to launch a package of what it calls TLTROs, with an initial size of €400bn. Similar to the Funding for Lending Scheme seen in the UK, another LTRO would reduce the cost of credit to banks, on the condition that those then get passed on to businesses.

"Counterparties will be entitled to borrow, initially, seven per cent of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014."

Two successive TLTROs will be launched in September and December 2014. All TLTROs will mature in around four years, in September 2018.

Ending Securities Markets Programme (SMP) sterilisation

Sterilisation is what the ECB calls the process by which it offsets the purchases of government bonds under its crisis-era SMP.

After buying up those bonds, the ECB goes back to the market to mop up the extra cash, selling an equal amount of instruments to the cash created.

It's been engaging in that since 2010. Ending that sterilisation will release billions of euros.

Prolonging Fixed Rate, Full Allotment (FRFA)

The ECB currently lends a bank as much as it desires at a fixed rate for a given period of time, and it has chosen to extend the time frame over which it is willing to do that.

It will do so for "as long as necessary" and "and at least until the end of the reserve maintenance period ending in December 2016".

Related articles