With coronavirus roiling markets worldwide, ECB expected to follow example of Fed and Bank of England with interest rate cut
As coronavirus fears rock financial markets worldwide, urgent moves by the U.S. Fed and Bank of England (BoE) to cut interest rates are making a similar move by the European Central Bank look all but inevitable.
The ECB is set to hold a scheduled policy meeting tomorrow, its first since the virus’ impact on the world economy raised alarm bells.
Economists predict the ECB will cut interest rates as well as focus on other financial and monetary instruments, stressing that an interest rate cut would likely have little effect so other instruments will be needed.
As it has “run out of ammunition, there is very little the ECB can actually do to cushion the economic impact from the unprecedented mix of supply-side and demand-side shock,” Peter Vanden Houte, the chief eurozone economist of ING Bank, told Anadolu Agency on Wednesday.
The question is whether a rate cut will have any effect at all, he said, adding that interest rates are already negative and banks are actually suffering.
“Fiscal policy and tax forbearance would be more effective than additional monetary easing,” he said in an email interview, commenting that the only effective measures the ECB could take would be credit-enhancing measures.
“More purchases of corporate bonds, (temporary) changes to the collateral rules, and targeted liquidity injections to support extensions of bank loans to companies with financial problems could be the measures,” he explained.
At its meeting tomorrow, he said he expects the ECB will take a “targeted” approach, using new targeted longer-term refinancing operations (TLTRO), which are Eurosystem operations that provide financing to credit institutions.
“A rate cut is not impossible, but it really would be the last resort,” he said.
ECB can tackle uncertainty in financial markets
The ECB can counteract the uncertainty in the financial markets, said Michael Schubert, a senior economist of Commerzbank, saying he also expects the ECB to ease its monetary policy.
“It is likely to take the form of a temporary increase in the volume of monthly bond purchases and a 10 basis points reduction in the deposit rate,” he added.
The uncertainty caused by the coronavirus has risen in recent weeks to a scale last seen in 2011, he said, when the euro zone sovereign debt crisis shook the financial markets.
Looking ahead to the meeting, Andrew Kenningham, chief Europe economist of Capital Economics, said:
“The ECB will reduce its deposit rate by 10 basis points. It will change the terms of its longer-term financing operations [using] TLTRO to ensure that more, and perhaps cheaper, loans [are available] to lend to affected regions and sectors.”
The Fed’s decision to cut interest rates by 50 basis points has upped the pressure on the ECB, he said, adding that a 10 basis points rate cut would leave even less ammunition for the ECB in the future.
Many economists fear that monetary and fiscal policy will be unable to offset the direct hit from the virus epidemic to supply and demand.
The use of monetary and fiscal tools, thus, could help to contain second-round effects on liquidity and confidence.