ECB makes credit cheaper for banks, keeps powder dry in virus battle

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FRANKFURT (Reuters) – The European Central Bank said on Thursday it would pay even more for banks to borrow from it but kept much of its remaining policy powder dry as it prepared for a long fight against the coronavirus’s fallout.

After unveiling a raft of stimulus measures over the last six weeks, including plans to buy 1.1 trillion euros worth of assets this year, the ECB said it would pay banks 0.50% for tapping its multi-year auction and 1% if the pass on that cash to the economy.

“The Governing Council decided to reduce the interest rate on TLTRO III operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations prevailing over the same period,” the ECB said.

Analysts expect the ECB to raise its annual bond-buying target for this year and add junk-rated bonds to its shopping list in the coming months as part of its efforts to keep the euro zone in one piece in the face of an expected wave of downgrades by credit rating agencies.

But the euro zone’s rate-setters may be keen to keep some pressure on the bloc’s political leadership, which has so far fumbled its fiscal response, leaving the ECB in a familiar role as the currency union’s chief crisis-fighter.

Thursday’s decision leaves the ECB’s benchmark Deposit Facility Rate at -0.5%, meaning banks are charged that annual rate for parking idle cash at the central bank.

The rate on the ECB’s Main Refinancing Operations, which banks can tap to obtain one-week credit from the central bank, was left at zero while the rate on overnight liquidity was fixed at 0.25%.

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