Although the economic and credit impact of Thursday's announcement by the ECB that cut rates below zero to boost recovery in the eurozone is likely to be minimal, the European Central Bank has demonstrated a commitment to provide different forms of further monetary stimulus, should they be required, Moody's Investors Service said on Friday.
The ECB cut interest rates to record lows, imposing negative rates on its overnight depositors to encourage banks into lending more and to fight off the risk of Japan-like deflation.
The ECB launched a raft of measures to fight low inflation and boost the euro zone economy. It lowered the deposit rate to -0.1%, meaning it will effectively charge banks for holding their money overnight. It cut its main refinancing rate to 0.15%, and the marginal lending rate - or emergency borrowing rate - to 0.40%.
“Overall, these measures are marginally credit positive for corporates and sovereigns, but broadly neutral (with positives and negatives) for banks,” Moody’s said.
Alongside anticipated cuts in policy rates, the central bank announced it will conduct targeted longer-term refinancing operations (TLTROs), aimed at improving credit provision to the non-financial sector.
Moody's said that the TLTROs are intended to boost credit provision to the private sector, bolstering economic activity and employment. If this happened, it would be positive for corporate and sovereign credit profiles.
In principle, any credit expansion as a result of the TLTRO could particularly benefit the peripheral economies, where lending is relatively high in relation to the size of their economies and reliance on bank credit for economic growth is correspondingly high.
"With the amounts available in the 2015 and 2016 TLTROs to be based on net lending in the twelve months prior to the operations -- and the threat of needing to repay the 2014 TLTROs in 2016 if on-lending conditions are not met -- banks have some incentives to start lending to the real economy now," said Marie Diron, a Senior Vice President in Moody's Credit Policy unit.
The TLTROs will have most impact on banks that see profitable lending opportunities, but are unable to seize them due to funding constraints and thus could be credit positive for these banks.
However, in general euro area banks are not currently short of funding, Moody’s said. “Even if debt issuance by financial institutions remains low by recent historical standards, bank credit spreads have fallen and debt markets are showing signs of expansion. Overall, the policy changes announced yesterday are unlikely to significantly alter the economic or financial outlook for the euro area.”
Their broader significance is that the ECB has demonstrated its commitment to providing different forms of further monetary stimulus, should they be required, the rating agency added.
"It is through their signalling effect that these measures are likely to have the greatest impact." continued Marie Diron.
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