The European Central Bank cut its main refinancing interest rate to zero from 0.05%, the interest rate on the marginal lending facility to 0.25% from 0.30% and the interest rate on the deposit facility to -0.40% from -0.30%.
It also expanded its monthly purchases of assets to 80 billion euros ($87 billion) starting from April, from 60 billion euros, and increased the percentage of a single issue of bonds by eligible international organizations or multinational agencies that it can buy to 50% from 33%.
However, by far the most important change in its policy is this: the ECB will buy corporate bonds among its regular purchases.
"Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases," the central bank's statement said.
This is a game-changer because it means big European corporations will find it easier to borrow money and (hopefully) invest in expansion, boosting jobs. On the downside, of course, these corporations might use the cheap debt to financially engineer higher earnings per share by buying back shares.
Whatever the result, it does mean that European companies' equities are likely to outperform -- the level of support for these stock markets is unprecedented.
As expected, the euro dropped sharply after the announcement -- Jim Cramer warned that this would happen. However, the single European currency picked up just as sharply after Mario Draghi remarked that following the central bank's measures, further interest rate cuts deeper in negative territory are not necessary judging by the present current conditions.
European stock markets were rising sharply after the announcement, with banks surging due to the generous loans that the ECB promised to give them -- but after his remarks about no further interest rates being necessary, bank stocks pared back gains, with the Stoxx 600 banking index down 2%, according to data from the Financial Times, after having surged by 7%.
The ECB also announced four additional Targeted Long-Term Refinancing Operations (TLTROs), with maturities of four years, to be launched from June. The interest rates for these operations can be as low as the deposit facility, it said. In other words, it may be prepared to pay commercial banks to take the money.
Some more highlights from Mario Draghi's news conference:
- On the TLTROs, there will be four of them, one every quarter starting in June and continuing to March 2017. Banks will pay the refinancing rate at the time of bidding (which has just been cut to 0%), but that can be reduced to as low as the deposit rate at the time of bidding, provided they lend on more funds than they are required to. The amount they can borrow is linked to the amount of loans on their balance sheet. "Banks that are very active lenders can borrow more than banks that are active in other activities," Draghi said.
- On corporate bonds purchases, the central bank will look carefully to see which corporations qualify as non-financial, but he did not give more details, saying technical explanations will be available later.
- On the perceived lack of power of central banks, he rejected the idea that central banks are out of ammunition because they have no policy instruments left. "I think the best answer to this is given by our policies today. It's a fairly long list of measures, and each of them is very significant. We have shown that we are not short of ammunition."
- On whether the eurozone is already in deflation. "The answer is no, we are not in deflation. The macro projections show that inflation will indeed be negative for several months this year, but by year-end will go back into positive territory... The time that it's taking to get back to our [inflation] objective is longer than it was, but this doesn't mean that we have deflation. The situation is different to what we had in Japan in the '90s," Draghi said.
All these measures had, to some extent, been anticipated by the markets, as I wrote yesterday. They were taken because it was becoming obvious that just pushing deposit rates further below zero would not be enough.
More and more voices are rising against negative interest rates. The latest to do so was the Bank for International Settlements, the bank of central banks, which put out a research paper saying it is doubtful they are passed on to the real economy and increase the vulnerability of the financial system.
Bankers have come out in force against negative interest rates, too. A roundup of banking industry executives' sentiment by the Financial Times shows they fear that negative interest rates will create asset bubbles, hurt economic growth and penalize savers even more, creating "social disparity" -- in the words of the President of Austrian Erste Bank, Andreas Treichl.
No wonder bankers are so worried. According to Morgan Stanley, a 10 basis-point cut in the ECB's deposit rate would bring about a 5% fall in the earnings of eurozone banks next year. That's because they have to pay to keep money with the central bank while the interest rates they can charge on loans given out are shrinking.
At the end of the day, however, there is only so much Mario Draghi can do. Sooner or later, European governments will have to step up to the plate and shower consumers with helicopter money, either in the form of tax cuts or by borrowing money at these historically low interest rates and doing something intelligent with it. Like investing in infrastructure, perhaps.