FRANKFURT (Reuters) – The European Central Bank will formally end its 2.6 trillion euro money-printing scheme — known as quantitative easing, or QE — on Thursday but stimulus will continue for years and the central bank may even look at further measures of support.
The following explains what is left in store for the ECB.
The ECB’s deposit rate is -0.4 percent and policymakers have pledged to keep it unchanged at least until late next year.
While the bank does not provide a longer guidance, policymakers have often said they are comfortable with market expectations, which see the deposit rate rising to zero only in 2020, and moving up by small increments thereafter.
Since the ECB aims to once again make interest rates its primary policy tool, the likely response to any further slowdown would be to push out rate hike expectations even further, a relatively easy move.
It is likely to be years before ECB rates reach a ‘neutral’ level, even if there were an unexpected upturn or a surge in inflation.
The U.S. Federal Reserve’s first post-crisis rate hike came in late 2015 and rates still have not reached ‘neutral’.
The ECB will spend cash from maturing bonds — about 200 billion euros next year — to buy additional debt to keep borrowing costs down.
These purchases are expected by markets to continue until sometime in 2021.
One way to provide additional support is to keep the time horizon open-ended, allowing policymakers to move back the end date at a relatively low cost to credibility if the economy falters.
WILL BANKS GET MORE LONG-TERM LOANS?
Probably, but on different terms and not just yet.
The ECB gave banks four-year loans in mid-2016 and for accounting reasons, needs to tell them by the middle of next year whether they will be rolled over.
Letting them expire would cut the ECB’s balance sheet and force some banks to borrow short-term at its 0 percent main rate, rather than the -0.4 percent deposit rate. This would be a de facto rate hike, which the ECB is keen to avoid.
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Additionally, some banks could struggle to secure enough multi-year funding to meet a regulatory requirement.
A new fixed-rate loan over a long horizon would limit the bank’s ability to raise rates. So the likely solution is a shorter loan, possibly three years, at a variable interest rate tied to the ECB’s main rate, which some would like to make permanent.
The ECB will continue to provide banks with liquidity through its regular one-week and three-month tender operations at least through 2019.
The tenders, at the 0 percent main rate, are done on the principle of full allotment, meaning banks get unlimited cash as long as they have the necessary collateral.
Extending full allotment beyond 2019 is also seen as a relatively easy option to provide support.
This is very difficult and unlikely for now.
The ECB has essentially run out of bonds to buy within its self-imposed rules.
Changing them would be likely to land the ECB in the European Court of Justice, which said earlier this week that those constraints ensured compliance with EU Treaties.
The central bank could expand into other asset classes such as stocks or even non-performing loans. But the political hurdle for such a step is high and would require a major shock.
Reporting by Balazs Koranyi; Editing by Catherine Evans
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