ECB deploys stimulus to ease virus damage, holds rates steady
THE EUROPEAN Central Bank, ECB, deployed targeted new stimulus measures to cushion the shock to the economy from the virus outbreak, but its president said monetary policy couldn’t do it alone and called for a “decisive and determined” response from governments. ECB President Christine Lagarde said the economy was facing a “major shock” and that the central bank measures unveiled Thursday were “almost surgically” targeted at areas where monetary policy could help. The central bank, she said, was “determined to support households and firms in the face of the current economic disruptions and heightened uncertainty”. But Lagarde added that a stronger response from eurozone governments was urgently needed to prevent the eurozone from falling into recession: “An ambitious and coordinated fiscal policy response is required to support businesses and workers at risk.” The ECB president said action should come “in the next few weeks, and not months”. She repeated the phrase at the start of her statement, and when asked if the eurozone faced a recession, said that depended “on the speed, the strength of the collective approach” by all players. She said currently announced fiscal measures were only €27 billion, or about a quarter of one per cent of GDP. The bank’s 25-member governing council decided a stimulus package that included the purchase of up to €120 billion (US$132 billion) more in bonds this year. The money is newly created and injected into the financial system. It comes on top of purchases worth €20 billion a month it is already carrying out, and would be aimed at corporate bonds, which should help keep credit available to companies. The European Central Bank said it was also providing more cheap, long-term loans to banks to make sure they have the liquidity they need. And the ECB will temporarily ease some capital requirements for banks to help them keep lending. It’s all aimed at helping businesses get the financing they need and stimulating activity to offset the downturn from all the closings and restrictions due to the virus outbreak. The central bank did not cut interest rates as many analysts had expected. Rates are already low, and economists have said deeper cuts might not help much. Thursday’s steps “will do no more than cushion the blow to the economy from the coronavirus,” said Andrew Kenningham, chief Europe economist at Capital Economics. “Monetary policy is powerless to prevent a deep downturn and, unlike in the US and China, it has little scope to support the recovery afterwards.” The move comes as the eurozone is forecast to slide into recession and financial markets keep falling over concerns about the virus outbreak’s hit to the economy. Concerns deepened after the United States decided to halt travel from 26 European countries. The bank’s policy meeting was held without several members of the 25-seat governing council physically present and participating by remote conferencing. Economists are saying that the impact of the virus outbreak is difficult to address with monetary policy, since it first and foremost deals a shock to the supply of goods and services. Monetary policy is better equipped to stimulate demand, not supply, by making credit more widely available. Central bank action is aimed at limiting the damage from knock-on effects of business interruption. More abundant and targeted credit could help businesses get through a period of interruption without going out of business. The Bank of England cut its key benchmark to 0.25 per cent from 0.75 per cent on Wednesday; the US Federal Reserve cut its benchmark by a half-percentage point to 1.0-1.25 per cent on March 3. Governments have announced some limited measures of fiscal support. Italy is earmarking €25 billion (US$28 billion) in new spending, and the United Kingdom said it would make ₤30 billion (US$39 billion) available.