THE ECB EXCEEDS EXPECTATIONS, AIMING FOR STIMULUS TO THE REAL ECONOMY
The ECB seeks to provide stimulus to the real economy by firing all its guns: interest rates, bank lending, direct asset purchases.
- We find the bank lending channel particularly important. Banks are a critical part of the European economy and lending constraints could pose a large threat to its recovery. The ECB has taken action to address such concerns, by bringing down bank funding costs and potentially even paying banks to lend to the real economy.
- The ECB appears confident on the effectiveness of its toolkit. President Draghi showed no concerns about the overall profitability of the banking system despite negative rates, expressed expectations for a large TLTRO2 take-up, and saw forward guidance as a powerful tool still exerting its influence across the entire yield curve.
- By stating that the scope for further rate cuts is limited and choosing to focus on other channels, such as bank lending and corporate bonds, Draghi has eased the pressure on other central banks to match the ECB’s moves. This is likely to keep the SNB in wait and see mode for the time being.
The actions announced today should also provide support to financial assets such as European bank equities and corporate credit, which had recently shown signs of distress, posing further risks to the fledgling euro area recovery.