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Today, the ECB private lower interest rates and restart the bond-buying program. The deposit rate has been raised by 10 basis points to -0.5%, while the other interest rates remain the same. The central bank will also start buying bonds for €20 billion a month starting in November. For the time being, the central bank will continue to roll over all previously purchased bonds.
The market was already pricing in a rate cut and a new bond-buying program. In that respect, it is no surprise that the central bank is restarting its asset purchase program. What is striking is that no end date has been set this time. The central bank will therefore continue to buy bonds for as long as it takes to achieve its policy objective. However, the ECB did announce that it will first taper the new asset purchase program before starting a possible increase in interest rates.
In the ECB's press release, we read more interesting passages. The central bank has also decided to ease the conditions of the new TLTRO program. For example, banks can request liquidity from the ECB at a more favourable rate in certain situations. This new round of liquidity support was already implemented earlier this year Announced to support the banking sector.
The ECB also wants to accommodate the banking sector in another respect. In addition to easing liquidity support, the central bank will also introduce a tiered system for the negative deposit rate. This means that in the future, banks will pay less interest on the excess reserves they park with the central bank. Last year, banks in the eurozone collectively paid €7.2 billion in negative interest rates to the central bank.
By not burdening part of the excess reserves with a negative deposit rate, banks will ultimately have to pay less money to the ECB. This is particularly beneficial for smaller savings banks, which have a smaller profit margin due to negative interest rates.
This article was taken from Geotrendlines
