ECB pumps up bank lending, bond buys to cushion virus impact

Tom Barfield, Agence France-Presse

Posted at Mar 12 2020 10:26 PM

FRANKFURT AM MAIN, Germany - The European Central Bank on Thursday followed other major central banks with a flurry of measures to cushion the impact of the coronavirus, including increased bond purchases and cheap loans to banks, but surprised observers by leaving key interest rates unchanged.

Policymakers agreed a new round of cheap loans to banks, known as long-term refinancing operations (LTROs) "to provide immediate support to the euro area financial system," a spokesman said.

They also eased conditions on an existing "targeted" LTRO program, aiming to "support bank lending to those affected most by the spread of the coronavirus, in particular small- and medium-sized enterprises."

And the ECB will pile an extra 120 billion euros ($135 billion) of "quantitative easing" asset purchases this year on top of its present 20 billion per month.

The "quantitative easing" (QE) scheme will include "a strong contribution from the private sector," the ECB said, as room to buy government debt while respecting self-imposed limits has grown tight.

On top of the monetary measures, the ECB's banking supervision arm said it would allow banks to run down some of the capital buffers they must build up in good times to weather crises.

Its teams supervising individual lenders may provide more flexibility to institutions under their remit, such as giving them more time to patch up shortfalls in their risk management, while a broader range of assets will count towards the watchdog's capital requirements.

President Christine Lagarde will be on the spot to explain the measures to journalists at a 2:30 pm (1330 GMT) press conference.

Stock markets had plunged again early Thursday on President Donald Trump's announcement that travelers from much of Europe would be barred from entering the US, after a Monday rout triggered by an oil price war combining with virus fears.

Losses on European stock indices deepened after the ECB's announcement, with analysts citing disappointment at its decision to leave the key interest rate untouched.

But they also said that the scope for the central bank to lift the markets' mood was always going to be limited.

"We do not think the ECB will be able to change investor sentiment... What matters for the economy is the trajectory of the virus itself and the measures which national authorities take to contain it," Andrew Kenningham of Capital Economics commented.

- Paying banks to lend -
Ahead of Thursday's meeting, analysts had highlighted tweaks to the ECB's bank lending scheme in particular as a critical tool for virus response.

"Bravo!" Pictet Wealth Management analyst Frederik Ducrozet tweeted after the statement, hailing the ECB's "bold decisions".

Ducrozet noted that under the changes to the TLTRO program, lenders that loan the cash they get from the central bank on to the real economy will enjoy an interest rate potentially as low as -0.75 percent.

At 0.25 percentage points below the rate the ECB charges on banks' deposits in Frankfurt, the difference represents an effective subsidy to the financial system.

Meanwhile, the central bank dispensed with what many expected would be a purely symbolic interest rate cut of just 0.1 or 0.2 percentage points.

The US Federal Reserve last week and Bank of England on Tuesday had space to cut interest rates by half a percentage point each to ease financial conditions.

But the ECB's already-negative deposit rate robbed it of that option.

"Forget rates," Allianz chief economist Ludovic Subran tweeted ahead of the meeting.

"All eyes (are) on real measures to immunize the financial system" such as changes to the bank lending schemes and supervisory rules.

Later Thursday, Lagarde will likely reinforce the ECB's long-standing call on governments to do more with their fiscal powers to buttress the eurozone economy.

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

Such past trials were overcome by central banks and governments working in concert.

In mid-February, Lagarde reiterated that "monetary policy cannot, and should not, be the only game in town" to stimulate the economy.

Italy on Wednesday announced 25 billion euros of support to its economy and the European Union has also mobilized up to 25 billion euros.

Chancellor Angela Merkel even signalled Wednesday that Germany could abandon its balanced-budget dogma.