By Geoffrey Smith
Investing.com -- The European Central Bank increased its quantitative easing program but left its key interest rates unchanged on Thursday, walking a fine line between the need to support a virus-hit economy and undermining a banking system already weakened by years of negative rates.
The ECB said its governing council had decided to increase its asset purchases by as much as 120 billion over the rest of 2020, adding to a monthly run rate of 20 billion euros ($22.4 billion) currently.
In addition, it said: “Additional longer-term refinancing operations (LTROs) will be conducted, temporarily, to provide immediate liquidity support to the euro area financial system. Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need.” Those LTROs will bridge the gap until the ECB's next major Targeted Long-Term Refinancing Operation in June.
By 9:09 AM ET (1309 GMT), the euro was at $1.1250, up from from $1.1208 immediately before the announcement but off its intraday high.
The package of measures is an implicit acknowledgement that the ECB doesn't have the same room as other central banks to support the economy with lower rates, having already cut its deposit rate to -0.5%. Analysts say the bank can't lower its key interest rates any further without causing damage to a banking system that has never fully recovered from the last financial crisis.
However, the ECB did follow through with its promise from last week to deliver targeted measures aimed at supporting credit to the real economy.
It said that banks that maintain their stock of credit to businesses and households will be able to refinance loans at rates as low as -0.75%, 25 basis points below the deposit facility rate. The reference rate for those so-called Targeted Long-Term Refinancing Operations, or TLTROs, between June 2020 and June 2021 will be set at 25 basis points below the ECB’s refinancing rate, which is currently at zero.
President Christine Lagarde will comment on the measures in more detail at her press conference starting at 9:30 AM ET (1330 GMT).
At the same time, the banking supervisory arm of the ECB said it will temporarily relax requirements on both capital and liquidity to ensure that banks can continue to support the economy.
In a statement, the Single Supervisory Mechanism said it will set aside bank-specific capital requirements known as Pillar 2 Guidance, and also the capital conservation buffer and the liquidity coverage ratio, two metrics introduced after the last financial crisis to improve the resilience of the banking system.