Europe turns to a familiar tool—negative rates—in bid to lend its way out of the crisis
The European Central Bank will begin extending loans to banks with interest rates as low as -1%, the lowest rate it's ever offered.
The European Central Bank intensified its response to the coronavirus crisis by cutting the cost of funding for banks, while urging politicians to provide more fiscal support.
Hours after data showed the worst three-month contraction in a quarter-century of statistics, President Christine Lagarde warned that the euro-area economy could shrink as much as 12% this year.
“Continued and ambitious efforts are needed, notably through joint and coordinated policy action, to guard against downside risks and underpin the recovery,” she said in a virtual press conference on Thursday. “An ambitious and coordinated fiscal stance is critical, in view of the sharp contraction.”
She spoke after policy makers reduced the cost of their emergency loan program for banks, and unveiled a further facility to inject liquidity into the outbreak-stricken economy.
In a statement, the ECB said it would be dipping further into negative territory with the new loans program. For banks that qualify, the lowest interest rate would fall to 50 basis points below the deposit rate, currently at -0.5%. In effect, the rates are -1%, a move meant to spur lending to companies and households will. Interest on the new, non-targeted facility, meanwhile, will be 0.25% below the main refinancing rate that presently is zero.
Officials kept their pandemic purchase program at 750 billion euros ($815 billion), which together with earlier programs, means it will buy more than 1 trillion euros of debt through the end of this year.
Most economists predict the ECB will bump that up later this year. Lagarde said the central bank is “fully prepared” to increase or extend the program if needed.
Bond investors largely signaled satisfaction with the move, with Italian yields falling after initially briefly jumping.
“For today, it’s enough,” said Carsten Brzeski, an economist at ING in Frankfurt. “So much has been announced in the past six weeks.”
Lockdowns to curb the spread of the coronavirus have sent unemployment soaring across the region and burdened the currency area’s economies with massive costs.
Figures earlier Thursday showed European output shrank the most on record during the first quarter, a period only partially blighted by coronavirus lockdowns. Countries such as Italy, Spain and France, with limited room to spend their way out of the crisis, saw contractions of around 5%.
With more pain to come, demands by the euro area’s most vulnerable nations for a joint fiscal response will only grow louder. So far, most government action has been at the national level.
Leaders have asked the European Commission to come up with a broader proposal by May 6, though its unclear how to resolve disagreements on whether aid should take the form of grants or loans. Likewise, Germany and the Netherlands have led opposition to joint debt over fears they’ll end up with much of the bill.
The squabbling has unnerved investors, who fret that heavily indebted nations such as Italy will be tipped into a deeper crisis. The country’s credit rating was unexpectedly cut by Fitch this week.
The response contrasts with other major economies where fiscal support has been stronger. Federal Reserve Chairman Jerome Powell warned on Wednesday, after maintaining his institution’s own emergency settings, that this is “not the time” to worry about the U.S. debt burden.
Michael Pyle, global chief investment strategist at BlackRock, finds the contrast telling. He says the ECB’s move on Thursday only amount to “incremental steps in the right direction.”
“When we compare what we’re seeing out of the Fed and U.S. policy makers more broadly, the scale in response is much different,” he told Bloomberg Television. “We’re going to need to see quite a bit more, looking ahead.”
The ECB already eased the terms of its bank-lending program at its March policy meeting. It also recently loosened standards on the collateral it’ll accept for refinancing.
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