While not making any change on the interest rates, the European Central Bank has announced a set of fresh stimulus measures to help the European Union to tackle the economic fall out of the spread of the coronavirus – now declared a pandemic by the World Health Organization.
The decision of the ECB was not what the markets were expecting.
The central bank of the EU has also urged euro zone governments to take their own measures for tackling the pandemic fall out on their economies.
Even given the ultimately temporary nature of the virus outbreak, the virus would have a “significant impact on economic activity”, said ECB President Christine Lagarde while addressing a news conference. She also called for “an ambitious and coordinated fiscal policy response”.
The ECB would be providing ultra-cheap loans to business of the bloc, increase asset purchases and provide banks with capital relief. The bank said even while there are millions of people in lockdown, a freefall in the global financial markets and companies are struggling to cope with the disruption of global supply chains.
Capital requirements for lenders that are struggling with the effects of the virus would be dropped by the ECB, said the bank supervisory arm of the central bank.
The outcome of the virus outbreak for the economy would “clearly depend on the speed and strength” of response to the epidemic that are taken collectively and such measures should be led by euro zone governments, Lagarde said while answering a question of whether a recession was looming on the euro zone.
“I don’t think that anybody should expect any central bank to be the line of first response. It’s fiscal first and foremost,” Lagarde said.
While increasing purchasing of bonds from the market by a total of 120 billion euros through the end of the year, the ECB announced that very cheap loans would be provided to businesses at rates as low as minus 0.75 per cent.
The bank however retained the historic low rates for deposits at minus 0.5 per cent which suggested that the bank’s policy makers that the time for the so-called reversal rate could be already near where it would be counterproductive to lower rates further because such lowering will hit profit margins of banks to the point where lending becomes burden.
Disappointed at the package from the ECB, the markets reacted by noting a drop in the euro, a jump to a seven month high for Italy’s 10-year bond yields and tumbling of stocks.
The measures announced by the ECB follow emergency rate cuts by the United States Federal Reserve and the Bank of England. There is a concern among policymakers that th coronavirus outbreak could push the global economy into a recession to the levels that were seen during the 2008 global financial crisis.
On the other hand, the banking watchdog of the European Union said that this year’s stress test of lenders will be postponed till next year. “Banks need to be in a position to continue financing households and corporate experiencing temporary difficulties,” said Andrea Enria, the ECB’s chief supervisor.
(Adapted from Reuters.com)