Eurozone Monetary Policy March 2019


Eurozone: ECB opens up liquidity floodgates to cushion coronavirus blow but keeps rates unchanged

March 12, 2020

On 12 March, the European Central Bank (ECB) adopted a package of measures to provide additional liquidity and stabilize markets in response to the fallout from the coronavirus (Covid-19) outbreak, while also reinforcing the stimulus package unveiled in September. The ECB will thus launch new targeted longer-term refinancing operations at even more favorable conditions to stimulate bank lending to SMEs. The Bank also announced it will ramp up its asset purchase program (APP), which was resumed on 1 November at a pace of EUR 20 billion per month, by adding an ‘envelope’ of EUR 120 billion of net asset purchases until the end of 2020. At the same time, the ECB kept the refinancing rate unchanged at a record low of 0.00%, the deposit rate at minus 0.50% and the marginal lending rate at 0.25%.

The severe impact of the coronavirus outbreak on already soft economic momentum and below-target inflation led the ECB to unveil further stimulus measures at its March meeting. Although the economy was seemingly strengthening at the outset of the year, the sudden spread of Covid-19 has shaken economic activity and rocked financial markets. On the supply side, the virus has substantially disrupted supply chains, while also heightening uncertainty and thus strongly affecting spending plans and investment decisions on the demand side. Meanwhile, prospects of faltering global demand and rising global supply weighed on energy prices and prompted a drop in inflation from 1.4% in January to 1.2% in February, which thus moved further below the ECB’s target of “close to, but below, 2%”.

The regional economy will inevitably take a significant short-term hit; the duration and intensity of the impact will now depend on the length and scope of containment measures adopted by member states, the spillovers on demand plans and supply chains, as well as on the fiscal response. With regards to the latter, ECB President Christine Lagarde urged member states to adopt a coordinated fiscal response to the crisis, stressing that the response needed to be “fiscal first and foremost”.

Looking ahead, Lagarde stated that the ECB will keep key interest rates “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”. Moreover, it will reinvest the principal payments from maturing securities encompassed in the Bank’s asset purchase program “for as long as necessary to maintain favourable liquidity conditions”.

Commenting on the unfolding situation, Carsten Brzeski, chief Germany economist at ING, noted:

“The wise owl is all of a sudden confronted with a multi-layered shock: an unprecedented combination of supply-side and demand-side shock, together with financial market turmoil and the increased risk of a negative feedback loop back into the real economy. At the same time, however, the ECB is also well aware of negative side-effects of its monetary policy stance and more general the fact that there it has almost run out of ammunition.”

Our panelists project the refinancing rate to end this year at 0.00% and 2021 at 0.03%.

Author: Massimo Bassetti, Economist

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Eurozone Monetary Policy Chart

Euro Area Monetary Policy March 20 20 0

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).

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