Last week’s main event for the financial markets was the ECB’s virtual Sintra conference. Since Jerome Powell from the Fed and Andrew Bailey from the Bank of England also participated, the markets were focused on the message sent by the three most powerful central banks in the world.
As it is known by market participants, the world’s central banks rarely act without communicating with one another. After all, they do meet regularly in Basel, Switzerland, under the umbrella of the Bank for International Settlements.
For once, the ECB’s message was celebrated by the markets. Lagarde offered the image of a powerful central bank ready to act in December. What is interesting is that Lagarde took another rate cut off the table but vowed for more easing.
What Message Did the ECB Send?
In a way, the main message was one of not relying on a vaccine solution only for economic recovery. Surely, a COVID-19 vaccine is more than good news. However, until a vaccine becomes available on a large scale, the negative economic impact continues. As such, the ECB vowed to act now, during the second wave of the pandemic, as decisive as it did during the first wave.
In other words, some economists argued that now that there is hope to win the battle against the pandemic after the positive vaccine news from last week, it may be wise for central banks to step back a bit and delay further easing. Instead, Lagarde replied with one of her best speeches of the presidency in the one year she sits at the helm of the ECB. She emphasized the need to have a continued response until the pandemic is behind us.
As mentioned earlier, the ECB ruled out a further cut of the deposit facility rate. However, it does see the PEPP program and the TLTRO as effective ones to fight the crisis. Speaking of the TLTROs (Targeted Long-Term Refinancing Operations), there is much discussion on the market about the dual rates that the ECB is setting and the effectiveness of this system.
On the one hand, the ECB refuses to cut the deposit facility rate further below -0.5%. However, on the other hand, it offers TLTROs with as low as -1% interest. This is where the dual rates system is effective in the eyes of the ECB, considering the strong demand for the product from commercial banks.
As such, the main message for the December meeting is that the ECB will offer even more advantageous TLTROs conditions, in a move that should affect the strength of the Euro.