The European Central Bank (ECB) has decided to take steps to boost liquidity, by offering more generous loans to banks so they can keep lending to small businesses, which are already facing disruptions and temporary funding shortages associated with the coronavirus outbreak.
The bank announced yesterday at a press conference in Frankfurt changes to its own monetary policy stance through enhanced quantitative easing (QE) and liquidity measures but kept the deposit rate and main refinancing rates unchanged at -0.5% and zero, respectively.
It unveiled an additional €120bn of net asset purchases until the end of the year, together with new longer-term refinancing operations (LTROs) and more favourable terms for the TLTROs from June 2020 to June 2021.
The ECB, however, did not push interest rates deeper into negative territory, a move that some investors had been expecting.
During the press conference, ECB president Christine Lagarde said the fiscal response to the virus outbreak has so far been complacent.
In a sign of market sensitivity, her comment that the bank’s role is not to close bond spreads prompted a widening in European government bond yields relative to Germany, before much of the widening subsequently retraced again as she clarified her statement in a further media interview.
The US Federal Reserve last week and Bank of England on Tuesday had space to cut interest rates by half a percentage point each to ease financial conditions. But the ECB’s already-negative deposit rate would not allow for that move.
Ulrike Kastens, economist Europe at DWS, said expectations of the bank had rarely been high, ”precisely because it was always obvious that the ECB can only contribute a small part to solving the corona crisis”.
“It was always obvious that the ECB can only contribute a small part to solving the corona crisis”
Ulrike Kastens, economist Europe at DWS
She said: “Perhaps that’s why the eurozone’s central bank didn’t even try to meet market expectations. The market would probably have been satisfied only if its expectations had been exceeded.”
The ECB, she said, has joined other major central banks in offering a targeted package to support financial conditions. “However, it did this much less aggressively than other major central banks did.”
Luigi Speranza, chief global economist at BNP Paribas, agreed, stating that the overall tone suggested a lack of conviction. “The lack of an explicit commitment to do ‘whatever it takes’ in response to the shock caused by COVID-19 was noticeable.”
Jeremy Gatto, investment manager at Unigestion, added that many countries with rates already at zero or negative are realising that pushing rates down further would only have limited effects.
“This is why the ECB left rates unchanged and opted for QE instead. We believe that despite providing some short-term relief, this will not be enough to contain the repercussions of the virus on the macro front and change sentiment, which remains negative.”
He added: ”Going forward, monetary policy alone will not be enough and we will likely see policy move towards fiscal, although this will probably take some time.”