ECB Adopts Extensive Measures Against Corona Crisis - key interest rate remains at record low - News-Credit-Mortgage-Coin

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Thursday, March 12, 2020

ECB Adopts Extensive Measures Against Corona Crisis - key interest rate remains at record low


With a whole bundle of measures, Europe's monetary watchdogs are fighting the economic consequences of the coronavirus pandemic.
The European Central Bank (ECB) will invest an additional 120 billion euros in bond purchases by the end of this year. Purchases should focus on the private sector, i.e. corporate bonds. In addition, the central bank wants to use particularly cheap long-term loans to persuade banks to provide small and medium-sized companies in particular with money.


"The euro area economies are facing a massive shock," said ECB President Christine Lagarde after the Governing Council meeting in Frankfurt on Thursday. The rapid spread of the corona virus is a great downside risk for the economy - combined with considerable uncertainties. The ECB expects only 0.8 percent growth in the euro area in the current year, in December the central bank's experts had still expected a 1.1 percent increase in the gross domestic product (GDP).

The monetary policy uses all its available tools to the consequences of the crisis to cushion assured Lagarde. Above all, however, decisive decisions in fiscal policy are necessary: ​​"All governments must be on deck and ready to act."
When it comes to interest rates, the monetary authorities are leaving everything as it is: the key interest rate in the euro area remains at a record low of zero percent, commercial banks will still have to pay 0.5 percent interest if they park money with the ECB. This negative interest rate should also persuade banks to grant more loans.

The Fed had jumped ahead with a surprising half-point cut in key interest rates last week given the global spread of the corona virus, and the Bank of England followed suit. However, the ECB's scope at this point is limited. The base rate in the euro area has been zero percent for four years now. The ECB only tightened the interest rate for bank deposits in September - and it is controversial whether this punitive interest rate actually boosts lending.
"The ECB is increasing liquidity in a targeted manner, thereby supporting lending to companies. This is good news, especially for companies that are particularly affected by the corona pandemic," said BVB President Marija Kolak.

According to many observers, the package put together by the ECB also proves that the ability of the central banks to act in the current crisis is limited. The chief economist of Dekabank, Ulrich Kater, commented: "The central banks' task at the moment is to interrupt the downward spiral. The ECB has not succeeded." DZ Bank warned: "Now it is time to realize that monetary policy does not cure the flu. It can only help to mitigate the blow of the corona pandemic and to support fiscal policy and companies via the banking sector."

Banks are relieved at various levels in order to be able to better perform their function as lenders: the ECB not only provides the institutions with liquidity through additional long-term loans, but also grants central banks money to commercial banks through existing programs at even more favorable terms.

The ECB's banking supervision also temporarily allows financial institutions to fall below the otherwise applicable requirements for capital and liquidity buffers. "Banks must continue to be able to finance households and businesses that are temporarily in difficulty," said ECB chief supervisor Andrea Enria.

In addition, the stress test planned by the European Banking Authority EBA for this year will be postponed to 2021. "This will allow banks to focus on their core businesses and ensure their continuity, including supporting their customers," said the agency in Paris. The results of the new crisis test should actually be published at the end of July this year.
In November, the ECB resumed its € 20 billion monthly government and corporate bond purchase program. Countries benefit, among other things, because they do not have to offer such high-interest rates for their securities if the central bank acts as a large buyer on the market.
For years, the ECB has been trying to boost the economy in the euro area with a flood of cheap money and drive inflation towards the central bank's target. The main goal of currency keepers is stable prices. The central bank is aiming for an annual inflation rate of just under 2.0 percent in the medium term with its 19 countries - far enough from the zero marks.
If inflation is too high, consumers lose purchasing power and the currency has less support. On the other hand, if prices stagnate or fall across the board, this can tempt consumers and businesses to postpone investments. Because it could soon be cheaper. This wait can slow down the economy.
However, the inflation rate in the euro area is still well below the ECB target. According to the latest Eurostat figures, price inflation weakened again in February. Consumer prices were 1.2 percent above the level of the previous month. In January 2020, the inflation rate was 1.4 percent. In its latest forecast, the ECB still expects 1.1 percent inflation this year.

Economists' votes on the ECB rate meeting
This is what experts say about the decisions:

Ifo President Clemens Fuest:

"Overall, the decisions of the ECB point in the right direction. They are primarily aimed at countering crisis-related liquidity problems at banks and small and medium-sized enterprises. The expansion of bond purchases with a focus on bonds from private issuers can help as well as the improvement of conditions the targeted and long-term program for bank refinancing (TLTRO III). "
Jörg Krämer, Chief Economist Commerzbank:
"I have never hesitated in the past to criticize the ECB's monetary policy, but today I have to say that I respect the ECB's decision not to cut interest rates further - although the pressure from the financial markets has certainly been high. Unlike Draghi, Lagarde has dared to disappoint the market. ECB President Lagarde rightly said that the other measures decided today are more targeted. "
Uwe Burkert, Chief Economist and Head of LBBW Research:
"The package was smaller than expected. The market reacted disappointedly. But if the ECB does not cut the key interest rate in this situation, the key interest rate will really have bottomed out. (...) The ECB may be ahead of the next Council meeting on Need to do April 30. Knowing that monetary policy is actually no good in this situation - neither against the virus nor against the business shock, but the last thing we need now is a panic at all of this Financial markets. "

Thomas Gitzel, chief economist at VP Bank:

"Christine Lagarde certainly imagined her first months in office differently. The French woman is facing the coronavirus before her first baptism of fire. However, the arsenal of the ECB is no longer too full Lower interest rates and even more government bond purchases will only have limited economic benefits. The right instruments must now be used. Christine Lagarde has recognized this. It is true that the ECB will buy more corporate bonds. This actually has a direct positive impact on corporate financing So the ECB is starting in the right place with higher corporate bond purchases. "
Ralf Umlauf, analyst at Landesbank Hessen-Thüringen:
"Speculation about a comprehensive package of measures by the ECB has increased in the last few days. The unchanged interest rates are a surprise, because the money market futures had even more than compensated for a reduction of 10 basis points. However, the ECB enables TLTRO III adjustments cheaper refinancing, even below the deposit rate, which means that the ECB accepts losses due to refi operations. In our view, this is a novelty in the history of the ECB and is the decisive stimulating measure in this package. "

Jörg Zeuner, Chief Economist Union Investment:

"Christine Lagarde knows how to act quickly and courageously in difficult times. Instead of being tempted to cut interest rates senselessly, the measures adopted today aim to support European companies in the difficult situation. This is an encouraging sign and should help to avoid unwanted second -round effects. (...) But the ECB could have done even more: A greater risk assumption by an even more courageous increase in the purchase program would have been a great help. One can only hope for sustained increases in prices if the Corona virus can be effectively combated. "

Bernd Krampen, analyst NordLB:

"At the subsequent press conference, Christine Lagarde emphasized the need for ambitious and coordinated reactions from governments to respond promptly and in a targeted manner to the shock. The stock markets had hoped for 'simpler' solutions - Lagarde did not deliver them. Their eyes are once again on Washington, where an orientation should come from. But can spending programs fight the virus? The best thing now would be a sufficiently tested, effective medication! Until then, it's time to wash your hands! "

Otmar Lang, chief economist at Targobank:

"Corona virus is a supply and demand shock that central banks cannot really influence. They cannot save or heal global value chains, and they do not bring consumers to travel agencies to book package holidays. It would be roughly presumed The fact that the central banks can currently use their monetary policy to have a stabilizing effect on financial markets and economic areas has already been demonstrated by the unscheduled cut in the US key interest rate on March 3, which has completely failed to achieve the desired effect left unchanged today, but announced a package of measures to help banks and entrepreneurs as borrowers. "

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