The European Central Bank left its key interest unchanged on Thursday, but launched several quantitative easing measures to support the euro area economy amid the crisis arising from the coronavirus, or Covid-19, outbreak that has been declared a global pandemic.
Following its scheduled meeting in Frankfurt, the Governing Council, led by ECB President Christine Lagarde, announced a comprehensive package of monetary policy measures.
The central bank decided to conduct additional longer-term refinancing operations, temporarily, to ensure immediate liquidity support to the Eurozone financial system.
“Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need,” the ECB said.
These longer-term loans will be offered in a fixed rate tender procedure with full allotment, with an interest rate that is equal to the average rate on the deposit facility.
The LTROs will provide liquidity at favorable terms to bridge the period until the Targeted LTRO, or TLTRO, III operation in June 2020, the bank said.
Further, all lending operations under TLTRO III will have considerably more favourable terms during the period from June 2020 to June 2021. These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises, the ECB said.
During this period, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations.
The central bank also raised the maximum amount of borrowing for counterparties under the TLTRO-III scheme to 50 percent of their stock of eligible loans as on February 28, 2019.
In this regard, the ECB said it will as relevant committees to explore collateral easing measures for counterparties to make full use of the funding support.
Policymakers also decided to add a temporary envelope of additional net asset purchases of EUR 120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.
“In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty,: the bank said.
The Governing Council retained the forward guidance on asset purchases and reiterated that the bank “continues to expect net asset purchases to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.”
The ECB left the key interest rate, which is the rate on the main refinancing operations, at record low zero, as expected.
The deposit facility rate was kept at -0.50 percent, while several economists had expected the bank to cut it by 10 basis points as part of its stimulus package in response to the virus outbreak. The marginal lending facility rate was kept at 0.25 percent.
The central bank retained its forward guidance on interest rates. “The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics,” the bank said.
Policymakers also said the reinvestment of proceeds from the sale of assets bought under the APP will continue.
Separately, ECB Banking Supervision announced temporary capital and operational relief in reaction to coronavirus outbreak.
The supervisory arm of the ECB said banks can fully use capital and liquidity buffers including Pillar 2 guidance.
The central bank will also consider operational flexibility in the implementation of bank-specific supervisory measures.
“The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff,” Andrea Enria, Chair of the ECB Supervisory Board, said.
As the severity of the Covid-19 unfolded outside its country of origin, China, business confidence slumped and this is reflected in the crashing stock markets. Apart from this, the oil price crisis due to a standoff between the main producer Saudi Arabia and Russia is also hurting sentiment.
Last week, the Federal Reserve cut its interest rate and the Bank of England followed suit yesterday. The UK central bank also announced several stimulus measures including a special funding scheme to support small businesses. The government unveiled a $39 billion stimulus package. Earlier on Thursday, the Australian government also announced a stimulus package.
The coronavirus outbreak has wreaked havoc on economies across the world. In Europe, Italy is experiencing a most severe outbreak and the country has gone into an almost total lock-down as the infected cases surged and deaths increased. The Italian government has also announced a stimulus package to support the economy.
On Wednesday, US President Donald Trump announced a 30-day ban on travel to all the 26 Schengen countries and the EU has disapproved such a move.
Businesses are taking a major hit due to supply-chain disruptions caused by the coronavirus outbreak. A survey by the think tank ifo showed on Thursday that more than half of German companies are likely to be impacted by the pandemic. Industry bodies representing the German chemical and mechanical engineering industries lowered their output growth forecasts for the year.
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