ECB Monetary Policy Decisions: Q4 2020 Recalibration

ECB Governing Council Meeting: October 29, 2020

Key Economic Context

• A fall in oil prices caused a fall in inflation.
• The pandemic led to an economic crisis, necessitating stimulus from the ECB to support the economy.
• Inflation fell from 0.7% in March to 0.4% in April.

Policy Decisions

1. The interest rates on the Main Refinancing Operations (MRO) and the interest rates on the marginal lending and deposit facilities will remain unchanged at 0.00%, 0.25%, and -0.50% respectively.

1. 1. 1. The ECB expects interest rates to remain unchanged or to be lowered until the inflation outlook converges to a level close to 2%.

2. The ECB will continue its **Pandemic Emergency Purchase Program (PEPP)**—€1,350 billion—until June 2021. Its objective is to offset the harm the pandemic could inflict on the path to price stability.
3. The ECB will continue its **Asset Purchase Programs (APP/QE)**, investing at a monthly rate of **€20 billion**, with the additional €120 billion temporary envelope. It plans to end these asset purchase programs when it begins to raise the key ECB rates.
4. The ECB will continue to offer liquidity transactions through refinancing operations, in particular, **Targeted Long-Term Refinancing Operations (TLTRO III)**, targeted specifically at banks. This will support bank lending to firms and households. These transactions offered a favorable interest rate (50 basis points less).

ECB Governing Council Meeting: December 10, 2020

Monetary Policy Recalibration

In view of the economic fallout from the resurgence of the virus (the second drastic wave), the Governing Council recalibrated its monetary policy:

1. Interest rates will be maintained at their respective levels: 0.00% (MRO), 0.25% (Marginal Lending Facility), and -0.50% (Deposit Facility).
2. The ECB decided to increase the PEPP envelope by **€500 billion** (from €1,350 billion) to **€1,850 billion**, and extended the purchase horizon to at least March 2022.
3. The ECB decided to extend the period of availability of the **TLTRO III** for another year, until June 2022. They also decided to increase the amount banks are entitled to borrow by 5% (to **55%** of eligible loans) to sustain bank lending. Three additional operations will be carried out (June, September, December).
4. The ECB decided to offer four additional **Pandemic Emergency Long-Term Refinancing Operations (PELTROs)** in 2021.
5. The **Asset Purchase Program (APP/QE)** will continue at the same monthly pace of **€20 billion**. The ECB will continue to reinvest the principal amount of maturing securities for an extended period past the date the ECB raises key interest rates.