ECB Cautiously Stimulative While BoE Stimulative Still

• Bank of England expands asset purchases
• ECB lowers main refi rate to 1.00% and provides credit support to banks

Rate decisions by the Bank of England and European Central Bank this morning provided a fair bit of material to chew on. The Bank of England left interest rates unchanged at 0.50% but did expand on their ongoing quantitative easing purchases. The European Central Bank, on the other hand, lowered interest rates by a quarter-point to 1.00%, tinkered with some of the other ancillary rates, and announced some additional credit support to the banking sector that still falls short of quantitative easing. All told, we believe the ongoing provision of liquidity by the BoE versus the still tepid response from the ECB highlights the risk that the economic recovery in the Eurozone may lag that of the U.K. and other major economies.

While the Bank of England left interest rates unchanged at just 0.50%, they did increase the total amount of assets to be purchased as part of their quantitative easing operations. In March, the BoE announced a plan to buy £75bn in corporate and government bonds, with a "pre-approval" to expand this by a further £75bn in the future if they saw the need. They have since been buying at about a £25bn per month pace, meaning they would have hit their cap by around the time of the next meeting. Rather than waiting, they decided to announce an increase by £50bn today. While there was some ambiguity in the statement, it does appear that the pace of purchases will continue unchanged through July, so we might expect another meaningful decision from the BoE at their July 9th meeting if they intend to expand these purchases further.

From the ECB, there was more of a buffet of policy decisions made, although the Governing Council (GC) appeared to purposefully avoid issues on which they could not reach a unanimous decision. The main refi rate was reduced by 25bps to 1.00%, and the deposit rate was left unchanged at 0.25% while the lending rate was reduced by 50bps to 1.75%. While there was some apprehension in the market that the ECB might announce this was as low as rates could go in the Eurozone, no such decision was taken. However, the GC appears to have simply decided not to decide at this time whether this is the bottom, rather than any affirmative decision one way or the other. There is still obviously contention on this topic within the GC.

Regarding exceptional decisions, or what the ECB calls its "enhanced credit support approach," again what they decided on today was only what could be decided by unanimous decision. Short-term lending from the banking sector to non-financial corporations continue to slide, contracting by 2.7% in the three months to March, while lending at maturities greater than 12 months is weak, but remains positive. As a result, the ECB will expand in June the maturity of the lending support provided by the ECB through refi operations to 12 months. They also made the decision in principle to begin in June to purchase euro-denominated covered bonds - bonds issued by banks in the Eurozone typically secured by property. President Trichet said that while the modalities will be decided and announced at the next ECB meeting on June 4th, the purchases will be in the ballpark of EUR60bn. It does not appear, however, that this will be financed by printing cash, so the ECB's balance sheet will not increase and this is therefore not quantitative easing. Rather, this is an attempt to ensure one area of financing for European banks, which has generally been seen as struggling, remains open and operational. While they did not rule out purchases of other assets in the future, there still appears to be little appetite to dive headfirst into quantitative easing by the ECB. It appears the ECB may address some loose threads next month, providing details of the asset purchase program, but is unlikely to make any other substantive decision at that time.

TD Bank Financial Group

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