Emily Cadman Closed Live blog: Action time from the ECB

It’s crunch time for the ECB. After more than six months of talking, the governing council has finally eased policy:

  • Deposit rates have gone negative decreasing by 10 basis points to -0.10%
  • The main refinancing rate has been cut by 10 basis points to 0.15%
  • The marginal lending facility rate has been cut by 35 basis points to 0.40%

The changes all take effect from June 11

ECB president Mario Draghi will take questions from the press at 1.30pm to explain the thinking behind the cuts

Follow all the action and market reaction here with economics reporter Emily Cadman and Lindsay Whipp in London, with Eurozone economy correspondent Claire Jones in Frankfurt.

Welcome to our live coverage of the ECB decision. Earlier today the BoE as expected left rates and monetary policy on hold

In the run up to the announcement, the euro is up 0.1 per cent against the dollar at $1.3609.

The international FTSE Eurofirst 300 is flat at 1,375.78, while the CAC 40 in Paris is up 0.1 per cent at 4,505.60 and Frankfurt’s Xetra Dax 30 is unchanged on the day at 9,924.77.

If anyone needs reminding of the background, here is a backgrounder Q&A on the issues at stake from Claire Jones:
Q&A: The ECB’s crucial vote

So will they finally go negative? Here is economic editor Chris Giles‘s 60-second explanation of what negative interest rates actually are

Video: Negative rates in a minute

Here’s a breakdown of the what is expected from the ECB
1. Cut the main refinancing rate by 10-15 basis points from 0.25%

2. Take the deposit rate below zero

3. Offer LTRO programme (likely to be similar to the BoE’s funding for lending scheme)

Other possibilities include:
4. Promise further action to revive the market for asset-backed securities.

5. Extend fixed-rate full allotment liquidity auctions.

ECB cuts benchmark rate to 0.15%

Deposit rate is cut to -0.1% from zero

And we now have negative interest rates…. which will come into effect on June 11

Here is the text of the opening statement

The short release in full:

At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:

The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.15%, starting from the operation to be settled on 11 June 2014.

The interest rate on the marginal lending facility will be decreased by 35 basis points to 0.40%, with effect from 11 June 2014.

The interest rate on the deposit facility will be decreased by 10 basis points to -0.10%, with effect from 11 June 2014. A separate press release to be published at 3.30 p.m. CET today will provide details on the implementation of the negative deposit facility rate.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today. Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today.

So it has finally happened – and the market haven’t yet decided what it thinks. With the euro first up – then down. Question is whether the market had already priced in the action.

So, now the wait to see what president Mario Draghi will say in the press conference. As per the ECB release:

“Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today.”

In terms of interest rate decisions, the cut to the main refinancing rate and the deposit rate has come in pretty much as expected.

This is from our FastFT team on the market reaction:

Following the European Central Bank’s historic, if widely expected, move to take one of its key benchmark interest rates below zero and push its main refinancing rate to a fresh record low, the euro is a little softer, while European equities markets have risen.

Here’s the rundown of the main market moves:

The euro is at $1.3595, down 0.2 per cent on the day, from $1.3606 moments before the announcement (see chart)
The FTSE Eurofirst 300 is now up 0.6 per cent on at 1,381.90. Like the region’s main national indices, it was flat beforehand.
Frankfurt’s Xetra Dax 30 is up 0.5 per cent at 9,972.90
The CAC 40 in Paris is up 0.5 per cent at 4,521.87

A key reason for the decision has to do with the eurozone’s falling inflation. Earlier this week, data showed inflation falling to just 0.5%. Way below the ECB’s target of close to 2%.

Reaction is now starting to come in from the markets. Marco Valli, chief eurozone economist, at Unicredit makes the point that the market was already positioned for cuts, so it is really waiting for what Mr Draghi has to say.

“A lot will depend on Draghi’s forward guidance as to whether rates can go down further from here – a negative deposit rate is unknown territory so they want to proceed with small steps to see the market reaction first.”

Unemployment is also stubbornly refusing to improve:

And a breakdown by country

More market reaction from Luke Bartholomew, fixed income investment manager at Aberdeen Asset Management, who says it is “a relief that the ECB has finally done something.”

He added the effects of a small negative cut on their own are likely to be minimal but it should put downward pressure on the euro, and

“it is an important signal of the ECB’s deflation fighting intent. All eyes are now on the press conference to see Draghi’s tone and whether negative rates will come with some form of liquidity provision.”

@trenchantly – no glimpses of MD as of yet. 24 minutes to go…

And a reminder that not everyone is going to be happy with the news…


The FT’s investment editor, James Mackintosh is offering help to all eurozone banks fretting in the wake of the ECB’s announcement:


Compared with the other key central banks across the globe, the eurozone has plenty of QE wiggle room

More analyst reaction is coming in. Here’s some from FastFT, with excerpts below

Carsten Brzeski of ING:

“Will it help to kick-start the economy? Probably not, but at least it demonstrate the ECB’s determination and ability to act. At the press conference starting at 2.30 pm CET, we will know whether the ECB only delivered a bare minimum or whether we will have to cite German poet Wilhelm Busch: this was the initial trick, but the second follows quick.”

Annalisa Piazza of Newedge highlighted the decision to cut the main interest rate by just 10 bp (most analysts had forecast 15 bp). However:

.”We suspect the smaller than anticipated cut will be explained as a “cosmetic” move that leaves the door open for further accommodation if needed. In our view, Draghi will assume a very dovish tone at today’s press conference, along with announcing some measures aimed at reviving the credit mkt.”

So what is the ECB hoping to achieve by introducing negative rates? The only recent precedent is the much smaller Danish central bank. One key worry for the ECB has been the strength of the euro, which has played a significant role in pushing inflation lower, as imports are made less expensive. Our Nordics correspondent Richard Milne, earlier this week, wrote:

The first thing to note is that the ECB’s justification for such a move will be different from the Nationalbanken’s. Denmark’s monetary policy is aimed at maintaining the krone’s currency peg with the euro. Denmark introduced negative rates to stem massive inflows from investors looking for a safe haven outside the eurozone that was causing the krone to strengthen.

The ECB, by contrast, has an inflation target. Last month, Mario Draghi, ECB president, said rate-setters were “comfortable with acting next time” because there was “dissatisfaction about the projected path of inflation”. While the ECB is primarily concerned with prices, the strength of the currency also matters: Mr Draghi has often said the strong euro is one of the most important reasons why inflation is so low as this has made imports cheaper.

And here is a note of caution from Azad Zangana, Schroders’ European economist , on whether negative rates will actually achieve their aim.

“We have disagreed with the move to cut the deposit rate in the past, as we expect banks to simply pass on the costs to households and businesses, either by charging fees for savers, but more likely through higher interest rates on new borrowers – the opposite of what the ECB is trying to achieve.”

So Draghi is about to take to the stage, it’s a blue tie

Draghi: there will be a targeted long term refinancing operation

Also: sterlisation is being suspended

This is what we’re looking out for in his statement -
mainly what the ECB is going to do about adding liquidity and whether it will offer a LTRO programme (likely to be similar to the BoE’s funding for lending scheme)

Also looking for more talk on future aggressive action including for example anything on further action to revive the market for asset-backed securities.

There will also be revised (or not) inflation forecasts.

On forward guidance: the key ECB interests will remain at present levels for “an extended period of time”

If required “we will act swiftly” if further easing measures are needed

So more details are due to be published at 2.30 BST on the ECB website Draghi says. About to talk through the decisions

On the negative rate: it will also apply to reserve holdings in excess of the minimum deposit requirements

Targeted Longer-Term Refinancing Operations (TLTROs) will mature in September 2018.

Counter parties will be entitled to borrow 7% of the loans to non-financial corporations in the euro area. Housing loans, and loans to the public sector will not be included.

We are getting lots of detail here from Draghi on the detail of how lending will be measured.

One thing coming out in the detail from Draghi is the repeated refrain that this is designed to support lending to the “real economy”. Focus is on lending to the non-financial private sector.

For those market watchers who wanted detail on more liquidity operations, they are certainly getting them.

On asset-backed securities, Draghi says that the ECB is “intensifying preparatory work” for outright purchases in the ABS market. The focus is on “simple and transparent” asset backed securities with “underlying assets consisting of claims against the euro area non financial private sector, taking into account desirable changes in regulatory environment”

So we are now away from the detail of the action, and onto overall macro economic forecasts

It isn’t too pretty a picture: unemployment high, spare capacity is “sizable” and loans to the non-financial private sector remains negative.

But a “moderate recovery” Draghi says. Annual GDP will increase by 1% this year he says.

This is a downwards revision from the previous estimates for this year, but a slight upward revision for 2015

And the inflation forecast: “low levels” over the coming months, but a gradual increase next year. This “underpins the case for today’s decision” he says.

The euro is moving lower as Draghi unveiled the TLTRO (or Targeted long term refinancing operations) The euro is at $1.3504, down about 0.7 per cent on the session FastFT notes

0.7% inflation for 2014. Again revised down.

Here’s the link to the release of the statement

This is the key section on TLTROs in Draghi’s statement:

“In order to support bank lending to households and non-financial corporations, excluding loans to households for house purchase, we will be conducting a series of targeted longer-term refinancing operations (TLTROs). All TLTROs will mature in September 2018, i.e. in around 4 years. Counterparties will be entitled to borrow, initially, 7% 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. Lending to the public sector will not be considered in this calculation.

“The combined initial entitlement amounts to some €400 billion. To that effect, two successive TLTROs will be conducted in September and December 2014. In addition, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark. “

Banks need to take “full advantage” of the current assessment of balance sheets, he says, while policymakers should “push ahead” in structural reform.

There has been “continued progress” in restoring public finances he says – pointing to overall government deficits. Projected to peak this year, and there after decline.

In short:
TLTROs will total E400bn, will mature in Sept 2018 and counterparties can borrow initially 7% of total amount of loans to euro area

More from the markets team over at FastFT

Frankfurt’s main benchmark equities index, the Xetra Dax 30 briefly broke through the 10,000 points mark for the first time after Mario Draghi, president of the ECB, outlined plans for a new targeted long-term refinancing operation, or LTRO.

Telecoms, industrial and banking stocks are leading the rally, as investors’ risk appetite sharpens on hopes the measures will work in boosting the eurozone’s recovery.

Commezbank’s shares are up 2.6 per cent at €11.74. Deutsche Telekom is 1.2 per cent higher at €12.55. Steelmaker Thyseenkrupp is up 2.1 per cent at €22.06.

Now we turn to questions. It is going to take a while to digest all of that detail, but there is no doubt the ECB has taken action.

Draghi says “for all practical purposes reached the lower bound, however this doesn’t exclude small technical adjustments which could lead to some lower interest rates in one or other parts of the corridor”

Asked about why the ECB hasn’t gone down the asset buying QE route, Draghi leaves the door open:

“We think this is a significant package” BUT “We are not finished here” Draghi says.

He defends suspending sterlisation, saying there are different market conditions now

Adds that for the TLTROs there will be additional reporting requirements, and the underlying spirit of the measure is to improve credit accessibility with the ultimate aim of price stability,

He also said that ECB does not want to interfere with AQR or incentivise weak banks.

ECB looked at other central bank experiences including BoE, final result is fairly different from BoE, he adds.

The package has three parts, Draghi says – ease the monetary policy stance, enhance the transmission to real economy and – the third reaffirmation – use unconventional instruments if needed.

Our global economy news editor’s view:


Draghi says that it could take three or four quarters for an effect to take place, but is pretty non committal on it.

And on the ABS: says that they didn’t discuss scope of the ABS.

Should be simple, no CDOs “squares or cubes” and, should be real, so that means ABS based on real loans not on derivatives and it should be transparent. It should have information available for underwriters and traders. They should understand what they’re trading.

This from Kit Juckes from SocGen

Mr Draghi is still speaking, but 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. The ECBs announced measures are also very close to the predictions of SG economics, so a hat tip top them. And the carrot of full QE is still dangling in front of us.

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

The FT’s Claire Jones is now up. What is it about the targeted LTRO which will encourage banks to take it up?

Draghi argues it is the:

- The low cost
- The four year term maturity
- And the requirement this money can’t be spent on sovereigns or on sectors that are “coming out of bubblish situation”

Draghi says decisions were unanimous. Saying there was “extraordinary and unusual degree of consensus” but “deep prolonged discussion”.

We are reacting to the risk of a too prolonged period of low inflation Draghi says, saying: “The longer it lasts, the higher the risks”.

The longer it doesn’t rebound the longer the governing council is in a “watchful condition” he says.

But, he says he doesn’t see deflation.

Draghi is asked to expand on his “we’re not finished here” comment and he replies that if there is a reason to do more then the ECB is ready to do more. But that

When we lower interest rates, when lower again, no? So we’ve just taken a decision which you can see is fairly articulated and very significant

On to criticism from German banks – any message to savers suffering from low interest rates?

Draghi says there is a

“Deep misunderstanding. The rates we have changed are for the banks, not the people.”

If rates get cut for consumers: “It is not us, it is a decision taken by the banks”

But concerns of the savers “should be taken very seriously” he says. The answer is that interest rates “will go up… when growth comes back”

More on the ABS:

We are working on the ABS but there are other actors that have to work on this. (It requires) revisitation to the regulation that had been introduced in past few years to eliminate some of the undue discrimination of this specific product when it is simple real and transparent. This is the key point. If this effort by ourselves and institutions by the regulators were to produce a product that is so attractive for the world, that means there will be a very sizeable financing inflow for SMEs in the real economy and that would be the greatest success.

Just briefly on the marginal lending facility being cut 35 basis points to 0.48%. This is from Sebastien Galy from SocGen on the importance of this:

The larger cut in the marginal lending rate is there to cap the large fluctuations in the money market. In a sense it means that the ECB is absorbing credit risk from weaker banks and at the same time cutting a support for EURUSD namely generally higher very front end yields than in the US.

Looking for reading on negative interest rates? Here’s our Nordic Correspondent Richard Milne’s take on Denmark’s recent foray.


The ECB is not yet satisfied with structural reforms, Draghi says:

“Progress has been uneven and far from complete”.

Consolidation of budgets on their own not sustainable, he adds, without growth policies.

Draghi predictably doesn’t want to answer a question asking him to compare Italy’s Matteo Renzi with France’s Manuel Valls.

More on the market reaction from the FT’s Capital Markets Correspondent Christopher Thompson

In response to Draghi’s liquidity boosting measures the eurozone’s benchmark overnight lending rate, dubbed eonia, has fallen from 0.191 per cent to 0.142 per cent. There had been fears that banks’ increasing repayments of LTRO monies had been putting upwards pressure on eonia, which helps determine rates on longer period loans.

On the exchange rate he reiterates that the exchange rate is not a policy target but very important for price stability and growth. And says that he has already discussed in the past how the current level of inflation been impacted by current level of exchange rate. He goes on to say:

First half of last 3 years it was mostly declines in the price of oil and food and other commodities that accounted for two thirds of difference between inflation then and now.

He says that’s about 1.3%.

Then, in the last year it was the prices in dollar terms haven’t moved much it was the exchange rate that has accounted for the decline in inflation.

Draghi says he is confident that in the medium term, the measures they’ve announced will drive inflation closer to the 2% target.

Asks people to “keep in mind” that the recovery is fragile and isn’t yet finished, but suggested unemployment is stabilising.

Asked about the impact of these measures on emerging markets, Draghi talks around the historic examples, before adding that the IMF is the only institution that could help emerging markets cope with temporary spill overs.

More on the reaction in Germany from the FT’s Frankfurt Bureau Chief Alice Ross who says the banking association is not happy.

“A negative interest rate on the deposits of commercial banks at the European Central Bank is unlikely to lead to the desired pick-up in lending,” said Michael Kemmer, managing director of Germany’s association for private banks.

“We also hardly see any of the deflation danger that is so frequently discussed.”

The association argued that it was not a lack of liquidity but overindebted companies that were stopping banks in the periphery from lending more – making it likely that banks would take the hit of negative interest rates themselves rather than venture into risky lending.

The association also argued that there had been no positive effect on
lending in Denmark after the Nordic country introduced negative rates
in July 2012.

Germany’s association of cooperative banks is also not happy, Alice Ross reports.

It argued that the decision to cut deposit rates was a “placebo effect” at the expense of savers. It said that the interest rate cuts would not help ailing eurozone states while also sending a bad signal to the entrenched savings culture in Germany.

“Through the ECB’s decision the already low interest rates for safe savings products will fall further. This weakens the incentives to save for Germans and puts the efficiency of private pension plans in danger.”

Draghi is asked about the rise of far-right and populist parties:
He says that it is important to acknowledge ” that diversity is an expression of democracy and is to be welcomed. But frankly it’s very good time to think deeply about how we can improve Europe, how can Europe again become a construction that delivers not only peace…that is not a small achievement, but prosperity and jobs.”

Ok, and that’s that for today, as Draghi takes his last question. Lots there to digest.

The ECB is starting to put the detail of some of the announcements up on its website here

So to wrap up -
The ECB came almost all guns blazing, though it did not venture as far out as QE. That however, remains an option, he suggests, leaving some ammunition in the bazooka.

“We are not finished here,” he says.

On rates:
1. Main refinancing rate was cut by 10bps to 0.15% from 0.25% (and Draghi says ECB reaching lower bounds of interest rate reductions bar some minor technical points)
2. The deposit rate was cut by 10 basis points to -0.10%
3. The marginal lending facility was cut by 35 basis points to 0.40%.

Introduced a E400bn four-year programme of targeted long term financing operations that are focused on non-financial eurozone companies and can account for a maximum 7 per cent of the bank’s overall loans in the currency bloc.

On the ABS market:
ECB is “intensifying preparatory work” to get this market going again, but it needs co-operation of other institutions including regulators to enable simple, real and transparent products to be made available.

On sterilisation:
The ECB will stop sterilisation. This means it will halt operations which mop up the liquidity added to the system by the central bank’s purchases of government debt through its Securities Markets Programme. At the moment, the central bank mops up around €165bn each week.

On fixed-rate full allotment liquidity auctions:
Those were extended.

We’re wrapping up here now. But our main news story will continue to be updated right here http://www.ft.com/…-00144feabdc0.html

Thanks for joining us.