Takeaways from ECB Actions and Press Conference

March 12, 2020

The European Central Bank’s second scheduled Governing Council meeting of 2020 produced an interest rate surprise. Despite strongly expected cuts, the marginal lending facility rate of 0.25%, refinancing rate of zero percent, and overnight deposit facility rate of -0.50% were each left unchanged. The last deposit rate cut was made in September 2019, and the other two rates had not been changed since March 2016.

Monetary policy was eased in other ways, however. Existing asset purchase program-injected liquidity will be supplemented by a further EUR 120 billion (roughly $135) during the balance of this year. Additional longer-term refinancing operations (LTROs) will “provide immediate liquidity support to the euro area financial system.” Also, more favorable terms during the period from June 2020 to June 2021 will be applied to all TLTRO III operations outstanding during that same time.

A bigger takeaway from today’s ECB statement was the direct plea for stimulus from fiscal policy and other elements of government, and this applies to all countries, not just those sharing the euro. In effect, this acknowledges the limitations of monetary policy against a shock against the backdrop of already weak global demand and low inflation.

Governments and all other policy institutions are called upon to take timely and targeted actions to address the public health challenge of containing the spread of the coronavirus and mitigate its economic impact. In particular, an ambitious and coordinated fiscal policy response is required to support businesses and workers at risk. An ambitious and coordinated fiscal stance is now needed in view of the weakened outlook and to safeguard against the further materialisation of downside risks.

Today’s Governing Council meeting coincides with a scheduled update of the ECB staff’s macroeconomic forecasts, a process which is done four times a year. The statement underscores that today’s updates were based on information prior to the recent intensification of the pandemic and therefore are already too optimistic at concerning 2020. Even without this enormous additional depressant, the ECB was compelled to revised projected growth in 2020 to 0.8% from 1.2% predicted in its December update. Growth in 2021 and 2022 is forecast to be 1.3% and 1.4%, and growth risks surrounding this baseline forecast are skewed to the downside. Regarding inflation, the rise of consumer prices this year is 1.1%, with an additional downside short-term risk due if much lower oil prices in recent days are sustained for any length of time. Projected inflation in 2021 of 1.4% and 1.6% in 2022 are also below target and the same as the estimates reached in the December update. While risks around these forecasts are considered balanced, the actual deviation from forecast could be quite large.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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