European Central Bank President Christine Lagarde surprised markets on Thursday as the bank chose to leave rates unchanged, but there was relief in the form of fresh stimulus measures that included additional EUR 120 billion bond purchases, as the Eurozone is facing a “major shock” from the coronavirus, or Covid-19, outbreak.
Stimulus measures from the ECB also include more ultra-cheap longer term loans, called LTROs, on easier terms to boost lending to households and businesses at a time of crisis.
The supervisory arm of the ECB extended some capital relief to banks by temporarily relaxing the capital buffer requirements.
This is the first quantitative easing move by Lagarde who became the ECB President after Mario Draghi stepped down at the end of October.
Speaking to reporters after the policy decision announcement, Lagarde said the latest decisions were taken unanimously and also that the ECB strategy review is now “clearly deferred”.
“The Governing Council will continue to monitor closely the implications of the spread of the coronavirus for the economy, for medium-term inflation and for the transmission of its monetary policy,” Lagarde said in her introductory statement.
“The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”
The ECB will make use of all the flexibility embedded in the asset purchase programme framework, Lagarde told reporters.
Lagarde stressed on the need for a stronger fiscal response to deal with the economic impact from the coronavirus outbreak, which was declared a “global pandemic” by the WHO a day earlier.
“An ambitious and coordinated fiscal policy response is required to support businesses and workers at risk,” she said.
Policymakers regard the current shock as severe, but temporary if the right measures are taken by all the players, she told reporters.
She also drew attention to the heightened volatility in the financial markets. After the US Federal Reserve and the Bank of England cut interest rates in surprise moves, the ECB was widely expected to lower its already negative deposit rate, at least by 10 basis points.
“We are not here to close spreads, there are other tools and other actors to deal with these issues,” Lagarde said. “The response should be fiscal first and foremost,” she added.
The ECB chief pointed out that the monetary policy is not determined by exchange rate variations. She also asserted that the ECB is certainly not at the reversal rate, not at the lower bound.
“The spread of the coronavirus (COVID-19) has been a major shock to the growth prospects of the global and euro area economies and has heightened market volatility,” Lagarde said. “Even if ultimately temporary in nature, it will have a significant impact on economic activity.”
The virus outbreak is a new and substantial source of downside risk to the euro area growth outlook, Lagarde said as she presented the latest ECB Staff macroeconomic projections.
The latest set of projections was compiled before the rapid spread of the Covid-19 in Europe. Still, the euro area growth forecast for this year was sharply cut to 0.8 percent from 1.1 percent.
The projection for next year was lowered to 1.3 percent from 1.4 percent. The outlook for 2022 was retained at 1.4 percent.
The HICP inflation forecasts for this year, next year and 2022 were kept unchanged at 1.1 percent, 1.4 percent and 1.6 percent, respectively.
“The implications of the coronavirus for inflation are surrounded by high uncertainty, given that downward pressures linked to weaker demand may be offset by upward pressures related to supply disruptions,” the ECB said.
“The recent sharp decline in oil prices poses significant downside risks to the short-term inflation outlook.”
The central bank left the refi rate unchanged at 0 percent, the deposit rate at -0.50 percent and the marginal lending facility rate at 0.25 percent.
The previous change was a 10 basis points cut in the deposit rate in September 2019.
The bank also retained its forward guidance on both interest rates and asset purchases.
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