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ECB Cuts Deposit Rate to Historical Low of -0.5%, Resumes QE

ECB has announced a new package of stimulus measure as inflation weakens. At the same time, the central bank revised lower both GDP growth and inflation outlooks for coming years. EURUSD initially plunged to as low as 1.0927 before a strong rebound.

1. Rate Cut: Deposit rate is reduced by -10 bps to -0.5%. The main refi rate and marginal lending rate stay unchanged at 0% and 0.25% respectively.

2. Tiering system: A two-tier system is introduced. Part of banks’ excess reserve holdings will be exempt from being charged at deposit rate.

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3. QE: A new asset purchases will begin in November 1. The central bank will buy at a monthly pace of 20 euro. There is no time limit for this operation. ECB noted that it will “run for as long as necessary to reinforce the accommodative impact of our policy rates, and to end shortly before we start raising the key ECB interest rates”. Concerning the previous round of QE, ECB reiterated that it will continue reinvesting, the principal payments from maturing securities.

4. TLTRO: ECB relaxed the borrowing conditions, removing the 10-bps spread with the average main refi rate. Recall that ECB announced in Iune that the interest rate in each operation of TLTRO-III will be set “at a level that is 10 bps above” the main refi-rate.

5. Forward Guidance: the forward guidance is no longer calendar-based. Instead, ECB noted that the policy rates will stay “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”. Moreover, it noted that the asset purchase program will continue “as long as necessary”. It will “end shortly before it starts raising the key ECB interest rates”.

At the latest economic projections, ECB downgraded GDP growth forecasts to +1.1% and +1.2%, from +1.2% and +1.4%, for 2019 and 2020 respectively. Growth outlook for 2021 stays unchanged for 2021. Meanwhile, inflation forecasts are revised lower to +1.2%, +1% and +1.5%, from +1.3%, +1.4% and +1.6%, from 2019 through 2021.

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