ECB under pressure to show virus-fighting mettle

The European Central Bank is under pressure Thursday to show it too has the firepower to respond to the coronavirus crisis and shore up the eurozone economy after other major central banks have already leapt into the breach.

With markets plunging, companies' cashflow drying up and financial stability under threat from the COVID-19 disease this means it is ECB president Christine Lagarde's "big test", said Pictet Wealth Management strategist Frederik Ducrozet.

"Markets need a circuitbreaker, whatever works," he added. The pressure to act in the eurozone is all the greater this week following big moves from the Bank of

England and US Federal Reserve, which both slashed key interest rates in extraordinary meetings.

In a conference call Tuesday with European heads of government, former International Monetary Fund (IMF) head Lagarde "drew comparisons with past crises" like the 2008 financial crisis, a European source told AFP.

Lagarde was "measured... speaking of an 'impact', but not a collapse," the source added, although the effects for the economy remain "very difficult to predict".

Unlike the 2008-9 financial crisis, central banks face an environment where international cooperation is not the first reflex of leaders like US President Donald Trump or British Prime Minister Boris Johnson.

Now, "everyone

is acting in their little corner of the world, often by surprise, and causing pressure or difficulties for the others" by shifting exchange rates, said Eric Dor of France's IESEG management school.

Markets worldwide plunged Monday as an oil price war launched by Saudi Arabia melded with virus fears. As traders remain jittery, eurozone inflation expectations on Tuesday touched alltime lows-calling further into question the ECB's ability to stoke price growth to its justbelow-two-percent goal after years of stimulus.

The Fed last week and BoE on Tuesday had space to cut interest rates by half a percentage point each to ease financial conditions.

By contrast, key ECB rates are already at historic lows, with the rate on banks' deposits in Frankfurt at -0.5 percent-meaning the central bank is effectively charging lenders to park money with the central bank.

Policymakers are unlikely to cut more than 0.1 or 0.2 percentage points further into negative territory, economists judge.

Instead of the classic central bank lever of interest rates, the ECB has other tools to turn to.

It could add to its portfolio of cheap loans to banks, known as TLTROs, which offer more favourable conditions for lenders the more credit they pass on to the real economy.

A source close to the ECB told AFP a "TLTRO targeted at small- and medium-sized firms" could be on the table, as those companies are believed to be especially vulnerable to the coronavirus fallout.