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Bloomberg
European Central Bank (ECB) President Christine Lagarde unveiled a calibrated package of monetary policies aimed at “surgically†supporting key parts of the euro area economy hurt by the coronavirus outbreak.
The Frenchwoman, warning of a “major shock†to global growth prospects, crafted what she described as a “comprehensive package†of measures intended to grease the wheels of the region’s economy before the disease causes it to seize up.
Rejecting investor pressure to cut its deposit rate again, the ECB promised to buy more bonds and issue additional and cheaper loans to banks in a more nuanced program than those of other central banks.
In a signal there are limits to her ability to keep providing stimulus, Lagarde urged governments to provide “an ambitious and coordinated fiscal policy response†to match her institution’s new injection of liquidity, symbolically placing that demand front-and-center in her opening statement.
The dramatic escalation in the ECB’s own response after weeks of monitoring the worsening outbreak arrived in parallel with news of a loosening in Germany’s reluctant stance towards fiscal easing, though still laced with caution.
“Together with the substantial monetary policy stimulus already in place, these measures will support liquidity and funding conditions for households, businesses and banks and will help to preserve the smooth provision of credit to the real economy,†Lagarde told reporters in Frankfurt.
The ECB’s move reflects mounting concern as the disease disrupts tourism, business travel and global supply chains, giving Lagarde a major test just over four months into the job.
On the market reaction, Lagarde said it takes time for such decisions to be analysed and appreciated. Describing the euro-zone economy, Lagarde said that data already signal a considerably worse outlook, and that the virus had “heightened market volatility†in the run-up to the decision. She unveiled new forecasts which showed projections that were “notably†lower for 2020.
The ECB’s measures also open a new dimension to the central bank’s crisis toolkit by marrying liquidity provision intended to channel money to small and medium-sized enterprises with an easing of capital demands, also aimed at encouraging banks to lend.
Where Lagarde defied market expectations was in keeping the deposit interest rate at minus 0.5%, staving off pressure for a cut deeper below zero. With negative interest rates hurting banks and irking some voters in northern European countries, the arguments in favor of shunning such a move were clearly persuasive.
The TLTRO measure has possibly created a dual-rate regime through the back door, by allowing the rate offered on the program — which would be used by banks to lend into the real economy — to fall by as much as a quarter-point below the deposit rate, which is already half a point below zero.
The ECB’s measures also open a new dimension to the central bank’s crisis toolkit by marrying liquidity provision intended to channel money to small and medium-sized enterprises with an easing of capital demands, also aimed at encouraging banks to lend.
The increase in quantitative easing will pump liquidity into the financial system, and the ECB signaled that purchases could be skewed towards corporate debt “support favorable financing conditions for the real economy in times of heightened uncertainty.â€
Lagarde’s call on “governments and all other policy institutions to take timely and targeted actions†has yet to be heeded throughout Europe. While indebted Italy, the worst-affected country in the outbreak, has added stimulus, Germany and particularly has been reticent.
Still, Chancellor Angela Merkel said on Wednesday that the government will do whatever is needed to limit the impact of the coronavirus. The administration is prepared to abandon its long-standing balanced-budget policy, according to people with direct knowledge of its economic policy.