ECB under pressure to act on COVID-19 fears – UOB

Lee Sue Ann, Economist at UOB Group, gives her opinion on the probable measures by the ECB to counteract the effects of the coronavirus on the economy in the region.

Key Quotes

“The recent actions from the US Federal Reserve, the Bank of Canada (BOC) and the Reserve Bank of Australia (RBA) certainly place the ECB under pressure to act. Some have not ruled out an earlier decision before 12 March, with expectations of a rate cut of 10bps in rates and changes to bank lending. ECB President Christine Lagarde said in a statement on Monday (2 March) that ‘the coronavirus outbreak is a fast developing situation, which creates risks for the economic outlook and the functioning of financial markets’. Lagarde also said that the central bank is ‘monitoring’ the situation and that it stands ready ‘to take appropriate and targeted measures’. Just a couple of days earlier on 27 February, Lagarde had downplayed the likelihood of an imminent monetary policy response to the virus by the ECB, reportedly saying it was too early to determine if it would cause a ‘long-lasting shock’ for the economy.”

“Indeed, unlike the rest of the global central banks, the ECB has little room for applying fresh stimulus without broadening the toolkit beyond the already negative -50bps deposit rate and the ongoing asset purchases announced in 2019. Further, the Germans’ hostility to lower interest rates will also mean the hurdle to further loosen monetary policy will be high.”

“For now, we could see the ECB announcing a new tool aimed at small- and medium-sized enterprises. Those are the companies that risk being hardest hit as COVID-19 shuts down tourism and supply chains. Given the ECB’s monetary policy space constraints and the increasing debate as to whether monetary policy is the appropriate tool in the first place to combat the COVID-19 outbreak, financial markets will likely respond more positively if EU countries consider a coordinated fiscal stimulus.”