The ECB’s decision to expand the pace of quantitative easing from €60bn to €80bn per month, to push deposit facility rates 0.1% further into negative territory to -0.4% somewhat exceeded market expectations. Negative interest rates will likely be a drag on European bank profitability, but the new series of TLTROs go some way to offsetting this drag in providing opportunities for exceptionally cheap funding for banks. In fact, in theory, banks could be paid money by the ECB to borrow, although the modalities of the operations are not yet clear.
But the most important aspect of the ECB decision looks to have been including non-financial corporate bonds in the list of eligible assets for quantitative easing. This decision gives the ECB the potential to become the most significant participant in the €900bn European non-financial corporate bond market. While the ECB actions are unlikely to transform the economic outlook, they are in keeping with the central bank’s ambition to cheapen funding costs for companies that seek to invest, and reduce the incentives to save rather than spend. As such, the positive market reaction looks entirely justified.