ECB December 8th policy decisions and market reaction
Aiming to support euro area economic growth and secure a sustained convergence of inflation towards levels consistent with the medium-term target of “below but close to 2%”, the ECB Governing Council decided at the December 8th monetary policy meeting:
(i) An extension of the asset purchase programme (APP) for 9 months until at least December2017.
(ii) A reduction in the monthly pace of asset purchases to €60bn from €80bn, effective as of April 2017. This came as a hawkish surprise because the ECB had committed to keeping the pace of €80bn monthly asset purchases until the Governing Council sees “a sustained adjustment in the
path of inflation consistent with its inflation aim”.
(iii) Adjustment on certain parameters of the APP, effective as of January 2nd 2017 aiming to address the bond scarcity issue though it has been less of an issue for the ECB lately after the recent increase in long-term bond yields.
The said amendments include:
(a) broader pool of eligible securities for the APP. The minimum remaining maturity for qualifying securities was
decreased from two years to one year, allowing purchases of bonds with residual maturity from 1 to 30 years;
(b) to the extent that is necessary, purchases of eligible securities with a yield to maturity below the interest rate on the ECB’s deposit facility (-0.40% currently). With respect to the latter, there are no details available yet. According to an ECB press release “the implementation details will be worked out by the relevant committees”.
(iv) Introduction of cash collateral in the PSPP securities lending facilities without having to reinvest it in a cash-neutral manner, an option offered by the ECB and by the national central bank of Belgium, Germany, Ireland, Spain and the Netherlands.
(v) Key interest rates remained unchanged (main refinancing rate at 0.00%, marginal lending facility rate +0.25%, deposit facility rate -0.40%)
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