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Mar 4, 2020

European Economy: ECB and BOE expected to take immediate policy action on coronavirus impact

Silvia Amaro

GS- Lagarde and Carney
LONDON, ENGLAND - FEBRUARY 27: Outgoing Bank of England governor Mark Carney (R), COP26 Finance Adviser to the Prime Minister, talks with President of the European Central Bank Christine Lagarde as they attend an event to launch the private finance agenda for the 2020 United Nations Climate Change Conference (COP26) at the Guildhall on February 27, 2020 in London, England.
WPA Pool
The European Central Bank (ECB) and the Bank of England are expected to announce stimulus measures in the coming days, after the Federal Reserve surprised global markets with a large rate cut.
Federal Reserve Chairman Jerome Powell announced an emergency rate cut Tuesday to deal with the ongoing outbreak of the coronavirus and its economic impact. The virus that started in China in late December has spread worldwide, denting exports and reducing air travel.
“The ECB will almost certainly try to intervene,” Florian Hense, European economist at Berenberg bank said Wednesday.
Data released Tuesday showed euro zone inflation hitting a three-month low in February, according to the European statistics office. This is a crucial data point for the ECB, whose primary mandate is to react to price changes.

ECB cut and cheaper loans?

The ECB is due to meet next week, but some analysts have not ruled out an earlier decision in Frankfurt, as Powell did Tuesday in the United States.
Some market watchers are expecting a rate cut of 10 basis points in the euro zone and changes to bank lending. However, ECB President Christine Lagarde could also announce additional measures.
“The ECB could introduce a special facility targeting SMEs (small and medium enterprises) hit by the crisis with looser terms and conditions than other open-market operations,” Frederik Ducrozet, senior economist at Pictet Wealth Management, said in an email Tuesday.
The ECB’s deposit rate — which is the interest that the central bank provides to financial institutions that deposit cash at the ECB — stands at -0.5%. The negative rate is meant to spur banks to loan money rather than park it at the central bank. The ECB is also providing other forms of stimulus to the euro zone via an open-ended bond-purchase program and cheaper funding for European banks. 
To be blunt, at the current juncture a vaccine would definitely help more than another rate cut.
Carsten Brzeski
Chief economist at ING Germany
Prior to the Fed’s decision, market expectations on Monday were pricing in a 10 basis point rate cut at the European Central Bank’s April meeting and a 65% chance that it could do it at its March meeting, Reuters reported. Nonetheless, some analysts are still skeptical that this will be the case. 
“We do not see an ECB rate cut as the likely policy response, although it can never be ruled out as the easiest compromise,” analysts at Bank of America said in a note Tuesday.
Lagarde said in a statement Monday 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.”
The late statement by ECB President Christine Lagarde provided the strongest signal to date that the central bank is about to shift its stance and ease monetary policy further as a response to the virus outbreak,” Ducrozet, from Pictet Wealth Management, also said.
Reuters, citing three sources familiar with the discussion, reported Wednesday that the bank is looking at a number of options and that there’s no immediate plan of action, given the necessary preparatory work. 

Bank of England in emergency cut?

The Bank of England (BOE) is also due to meet later this month, but analysts at Nomura are predicting an emergency rate cut this week.
“We have, therefore, adjusted our view to ... an emergency 25bp (basis point) rate cut this week allowing the Bank time to formulate a plan for more targeted easing at the end of the month,” two Nomura economists said Tuesday in reaction to the Fed’s announcement.
The outgoing governor of the BOE, Mark Carney, said Tuesday that the coronavirus could produce a “large” but temporary hit to the British economy. He had also said previously that the virus is already denting tourism and manufacturing in the U.K.
“The BoE does not sit at the heart of the Covid-19 crisis, but it is one of the few major central banks left with significant policy space,” economists at Citik said in a note Tuesday.
“However, there are also some reasons to believe that the BoE will wait a little longer and be a little less aggressive than their colleagues across the pond,” they said, highlighting that a new governor is due to take over before the next policy meeting and that the U.K.’s departure from the EU is still embroiled in some economic uncertainty.
Nonetheless, most analysts are pricing in a 25-basis point cut to rates at some point this month.
Kallum Pickering, U.K. economist at Berenberg bank, also said the BOE could signal a new bond-buying program, if economic risks increase further.
Central banks may be back in the spotlight, but some economists are doubtful that their decisions can make a significant impact — after a decade of easy monetary policy.
“The coronavirus and its impact on the economy, in our view, call for fiscal rather than monetary policy,” Carsten Brzeski, chief economist at ING Germany said in a note Tuesday.
He added that “there is very little the ECB can do, besides calming financial markets. To be blunt, at the current juncture a vaccine would definitely help more than another rate cut.”

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