ECB Surprises Dovishly: Announces New TLTRO, Changes Rate Guidance

As we noted earlier, the bar was high for the ECB to surprise dovishly, yet it did just that moments ago when it announced (amid unchanged rates) that not only is it announcing a new series of TLTRO "starting in September 2019 and ending in March 2021, each with a maturity of two years", but also changed its rate guidance, extending its rate guidance beyond "at least the summer of 2019" and now sees rates on hold "at least through the end of 2019."

The full statement below:

At today’s meeting the Governing Council of the European Central Bank (ECB) took the following monetary policy decisions:

(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

(2) The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

(3) A new series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be launched, starting in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help to preserve favourable bank lending conditions and the smooth transmission of monetary policy. Under TLTRO-III, counterparties will be entitled to borrow up to 30% of the stock of eligible loans as at 28 February 2019 at a rate indexed to the interest rate on the main refinancing operations over the life of each operation. Like the outstanding TLTRO programme, TLTRO-III will feature built-in incentives for credit conditions to remain favourable. Further details on the precise terms of TLTRO-III will be communicated in due course.

(4) The Eurosystem’s lending operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period starting in March 2021.

Here is a redline comparison from the last ECB announcement:

And now we await Mario Draghi how the announcement of the TLTRO is not indicative of a "serious economic shock" as it was framed back in November, and that Europe is not in fact sliding into a new recession.

The market responded immediately by sending the EURUSD sharply lower in kneejerk reaction, although much of the losses have been recouped, even as money markets pushed out the first ECB rate hike to September 2020.