ECB to boost banks but markets unimpressed by unchanged interest rates
The European Central Bank on Thursday kept its key interest rate unchanged but announced a range of measures to provide cheap funding for eurozone banks to help them support the economy through the coronavirus epidemic.
The ECB also said it would increase its quantitative easing program by €120 billion this year, with a particular focus on buying private sector debt.
And as the single supervisor of the eurozone banking sector, the ECB also said it would allow lenders to dip into the reserves they were forced to build up in the last ten years as capital buffers.
The decision to keep interest rates steady disappointed investors. World stock markets fell further after the ECB decision Thursday which followed the announcement Wednesday night by US president Donald Trump banning travel to the U.S. from European Union countries by foreign nationals.
The central bank’s ruling body adopted the plan unanimously, ECB president Christine Lagarde said, contrary to previous meetings dominated by severe differences between eurozone central bankers.
The Stoxxx Europe 600
was down in afternoon trading, with the French CAC40
index and German Dax
The decision to leave its benchmark interest rate steady was the one markets were focusing on after the Bank of England cut its own key rate by 50 basis points Wednesday and a similar move by the U.S. Federal Reserve on March 3.
The ECB’s key rate is already negative, at -0.5%, and lowering it further would have inflicted another blow to eurozone banks which play a key role in financing the economy, unlike the US where businesses also fund themselves on capital markets.
Furthermore, lowering interest rates is not the most efficient way to fight the consequences of the coronavirus epidemic, since it can’t deal with a supply shock such as one induced by idle factories or employees working from home.
The ECB will provide major funding facilities for eurozone banks to help them keep lending to struggling companies hit by the epidemic’s consequences. First it will “immediately” offer a long-term liquidity facility at an interest rate equivalent to its deposit facility which is currently negative.
More importantly it will improve the terms of its “targeted long-term refinancing operation”, a special instrument that is to run in bimonthly allotments until June, 2021 to “support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises.” For banks that maintain their portfolios of loans to businesses, the interest rate charged by the bank will be 25 basis points lower than the ECB’s own key rate.
In other words, the ECB will de facto subsidize the banking sector. Banks will pay the central bank -0.5% to lend it money overnight but get 0.75% from the ECB for taking the money back and passing it on in the form of loans.
Markets however seemed unmoved by the measure, with shares of major European banks such as Deutsche Bank
, BNP Paribas
or Intesa Sanpaolo
tanking on Thursday.
Quantitative easing boosted
The ECB will add €120 billion this year to its ongoing asset-buying program with a focus on private sector debt. It is currently acquiring €20 billion a month, after having built up a portfolio of €2.6 trillion of mostly government bonds. Lagarde didn’t say how front-loaded the additional program would be, but it could in theory be spent before summer to aim for maximum impact.
Lagarde also hinted that the ECB could use “all the flexibility” in the rules it set for itself for quantitative easing. This could mean using the wiggle room to increase the proportion of Italian bonds in its portfolio, in order to alleviate market’s pressure on the country. However, Lagarde’s comment at the press conference that the ECB wasn’t “in the business of lowering spreads” sent Italian 10-year yields
soaring after she spoke, jumping from 1.2% to 1.6%.
Governments still missing in action
Lagarde started her press conference after the ECB meeting by urging eurozone governments to deal with the coronavirus impact with an “ambitious and coordinated fiscal policy response … to support businesses and workers at risk.” The pandemic, she insisted, means that Europe is contemplating “a considerable worsening of economic growth outlook.”
Her call has little chance of impressing eurozone governments still unable, after several finance ministers’ meetings and one conference call among their leaders, to agree on any collective response to the crisis two months after it started.
All the ECB president could do is indicate that didn’t believe that European leaders would let “complacency and slow-motion processes” hinder their efforts, but in that respect, they are working hard at disappointing her.