Friday, 5 Mar 2021

European Central Bank ramps up stimulus but stops short of rate cut

FRANKFURT (REUTERS) – The European Central Bank (ECB) approved fresh stimulus measures on Thursday (March 12) to help the ailing euro zone economy cope with the shock of the coronavirus pandemic but unexpectedly kept interest rates on hold, a decision that may dismay markets.

With financial markets in free fall and companies struggling with disrupted supply chains, the ECB said it would give businesses more ultra-cheap loans, raise asset purchases and provide banks with capital relief to cope with the downturn.

“These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises,” it said in a statement. “A temporary envelope of additional net asset purchases of €120 billion (S$189 billion) will be added until the end of the year, ensuring a strong contribution from the private-sector purchase programmes.”

Its move follows emergency rate cuts by the United States Federal Reserve and the Bank of England, highlighting fears among policymakers that the epidemic could push the global economy into recession.

The ECB said it would offer a previous longer-term refinancing operation at a rate as cheap as minus 0.75 per cent and conduct additional longer-term refinancing operations to provide immediate liquidity support to the euro area financial system.

But the deposit rate will stay unchanged at a record low minus 0.5 per cent, suggesting policymakers believe it may already be near the so-called reversal rate, where further cuts are counterproductive because they hurt bank margins to the point of thwarting lending.

The euro zone’s central bank kept the door open to further rate cuts, keeping its interest rate guidance unchanged.

In addition to the ECB’s moves, its separate bank supervision arm said it would offer lenders temporary capital and operational relief in reaction to the coronavirus.

Banks can fully use capital and liquidity buffers, including Pillar 2 Guidance and will benefit from relief in the composition of capital for Pillar 2 Requirements, the supervisor said.

While policymakers say the financial sector is sound and there will not be a repeat of the global financial crisis, European stocks have dropped 28 per cent in recent weeks with banks taking an even bigger hit of 35 per cent.

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