Having mislaid his bazooka in December, Mario Draghi has returned to the fray firing a blunderbuss. The ECB announced an unexpectedly wide range of easing measures, including cuts in all three key interest rates, an expansion and broadening of asset purchases, and a new TLTRO lending programme under which banks will be paid to borrow. While superficially impressive, this scattershot approach will probably have limited impact on monetary conditions and the economic outlook.

The main positive surprises in today’s announcements were: 1) a 5 basis point (bp) cut in the main refinancing and marginal lending rates, in addition to a 10 bp reduction in the deposit rate; 2) a €20 billion expansion of the monthly rate of asset purchases, with the programme extended to non-financial corporate bonds; and 3) new four-year TLTRO operations under which banks can borrow at the negative deposit rate if they expand their lending by modest amount over the next two years*.

These initiatives, however, are marginal. Market rates are now tied to the deposit rate, not the main refinancing rate. The cut in the latter will lower interest payments for banks currently borrowing from the ECB but will simultaneously reduce interest received on current account balances (i.e. required reserves) – the net impact on banks in aggregate will be insignificant.

Buying €80 billion rather than €60 billion of securities per month, meanwhile, is unlikely to exert much additional downward pressure on yields, although the extension to corporate bonds should depress spreads.

The new TLTROs will be welcomed by liquidity-short banks but institutions with excess reserves have little incentive to borrow, and the net impact on banking system income will be, at best, neutral – funds lent by the ECB will be reflected in a larger outstanding balance in the deposit facility, on which banks will be charged 40 bp, offsetting the TLTRO subsidy.

Relative to market expectations, the main negative surprises today were that the deposit rate cut was limited to 10 bp while the ECB has ruled out introducing a tiered payment system, which has been widely regarded as necessary for Eurozone rates to fall further towards Swiss / Danish levels. Indeed, Mr Draghi stated that he does not anticipate a further reduction.

The net impact of the package on monetary conditions and the economic outlook is likely to be small. The market reaction appears logical, with the euro stronger on reduced prospects of a further deposit rate cut, “core” government bond yields little changed and bank shares rallying as the deposit rate and TLTRO news has calmed fears of a squeeze on net interest margins.

*The requirement is to expand the stock of eligible loans by 2.5% between 1 February 2016 and 31 January 2018, or by less if such loans were reduced in the year to 31 January 2016.