Central banks around the world were under fire in 2020. The pandemic found most of central banks in the developed world with interest rates at the lower boundary. How to react, and what additional steps to take when the interest rates are already at or below zero?
The ECB provides a great example of how to ease monetary policy without touching interest rates.
In any crisis, a fast response is crucial, and central banks knew that. Just like the Fed, which announced new quantitative easing programs, the ECB did the same. It increased its APP (Asset Purchase Program) by EUR120 – a move announced in March. Moreover, it pledged EUR20 billion per month in ongoing APP purchases and reinvestments.
Conditions for the third round of Targeted Long Term Refinancing Operations (TLTRO) eased in March and picked up in April. Borrowing allowances while the borrowing rate was set into the negative territory. In other words, the ECB will take a loss on its loans, in order to provide liquidity and support to the banking system.
The central bank activated EUR swap lines with either Bulgaria, Croatia or Denmark. It has now reactivated the famous USD swap lines with the Federal Reserve of the United States and other central banks in daily 7-day and 84-day operations.
In April, the ECB introduced the PELTROs (Pandemic Emergency Longer-Term Operations) at an interest rate of -0.25 basis points. It has also reduced capital requirements for market risk, as well as providing further guidance for dividend payments and for moderation in remuneration.
The PEPP program (Pandemic Emergency Purchase Program), introduced in March, was expanded in June by EUR600 billion to EUR 1.35 trillion. It even promised reinvestments at least until the end of 2022.
Why are all these measures important for the trader? They reveal the extent of the easing going on at the ECB. Yet, the Euro appreciated all this time, instead of doing the opposite. How come?
One explanation comes from the fact that currencies move in pairs. A currency pair reflects the monetary policy conditions of both central banks. If the market perceives another central bank’s actions having an even bigger impact on its currency, it will react promptly.
Therefore, it is possible for the ECB to ease and the euro to rise. Still, the extent of the easing is nothing short of remarkable.