APRIL 7, 2016
ECB minutes expose divisions
Accounts of the European Central Bank’s latest policy vote have laid bare divisions between the eurozone’s monetary policymakers over their new stimulus package.
Last month the ECB cut interest rates to fresh record lows, expanded its quantitative easing package by €20bn to €80bn-worth of purchases a month, and unveiled series of auctions to lower banks’ funding costs, writes Claire Jones.
The minutes also reveal that the 25-member governing council discussed the introduction of a Bank of Japan-style tiered deposit rate system, protecting lenders from the levy imposed on them by negative rates. A shift to this system was rejected by most officials on the grounds that it was too complex operationally and that there was, as yet, “little evidence” of the negative side effects of negative rates on banks’ profitability.
The ECB confirmed that its deposit rate, cut by 10 basis points to minus 0.4 per cent in March, could fall further should inflation and growth in the single currency area weaken again. The lower bound on interest rates had not been reached.
Two of the 21 voting members of the governing council were against the package that did pass, while another two non-voting members objected, according to a person familiar with the matter. Those four include the council’s two German members, Bundesbank president Jens Weidmann and board member Sabine Lautenschlaeger, and head of the Dutch central bank Klaas Knot.
“These views are a minority, but they indicate that Mr. Draghi is taking the central bank down an uncomfortable path from the point of view of the Bundesbank,” said Claus Vistesen at Pantheon Macroeconomics.
Jonathan Loynes at Capital Economics said the minutes “may reinforce concerns that the Governing Council is starting to run out of ammunition.”
The minutes highlight disagreement over several elements of the package — including four new auctions of ECB cash which will in effect subsidise lending by eurozone’s banks, the rate cuts and the expansion of QE to include corporate bonds.
The auctions, known in central bank parlance as Targeted Longer-Term Refinancing Operations or TLTROs, will run each quarter from June until next March.
The account said there was “very broad support” for the view that the central bank should provide “strong price incentives” through the new auctions in order to spur lending to the eurozone’s businesses and households.
However, “a few members” of the governing council were concerned about the size of the incentives offered. The auctions will pay banks up to 0.4 per cent to bloat their loan book to businesses and households. The rate tallies with the deposit rate, which now stands at minus 0.4 per cent.
“The price reduction of up to the level of the deposit facility rate seemed to be rather generous, could lead to market distortions and could contribute to the preservation of weak business models by some banks,” the minutes said.
Other members thought the decision to purchase high-grade corporate bonds under the QE programme could lead to market distortions.
The minutes said:
In the euro area, the market for these bonds was generally not very liquid or large. The direct impact on corporate financing conditions and investment behaviour appeared doubtful, as the eurosystem (of central banks) would mainly purchase bonds from highly-rated, cash-rich corporations, whose financing costs were already very low.
The inclusion of corporate bonds in QE was seen by others as “strengthening the credibility” of the ECB keeping to its target of €80bn-worth of bond buying from now until at least March 2017.
It could also benefit credit conditions for smaller companies, with no access to bond markets, by forcing banks to lend to them rather than large corporates which can issue debt themselves.
No comments:
Post a Comment