ECB and Bank of England may take urgent policy action following the Fed
The European Central Bank (ECB) and the Bank of England (BOE) are expected to announce economic stimulus measures in the coming days after the Federal Reserve surprised global markets with an emergency significant rate cut..
Fed Chairman Jerome Powell announced an emergency rate cut on Tuesday to deal with the ongoing coronavirus outbreak and its economic impact..
«The ECB will almost certainly try to intervene», – Florian Hense, a European economist at Berenberg Bank, said on Wednesday.
Inflation in the eurozone hit a three-month low in February this year, according to data from the European Statistical Office, which were published on Tuesday. This is a key moment for the ECB, whose main task is to respond to price changes.
The ECB plans to hold a meeting next week, but some analysts do not rule out an earlier decision in Frankfurt, as Powell did on Tuesday in the United States..
Some market watchers expect a 10 basis point rate cut in the euro area and changes in bank lending. However, ECB President Christine Lagarde may also announce additional measures.
«ECB may put in place a special mechanism targeting SMEs (small and medium-sized enterprises) affected by the crisis, with softer conditions than other open market operations», – said Frederik Ducrozet, senior economist at Pictet Wealth Management, on Tuesday via email.
The ECB’s deposit rate, that is, the interest that the central bank pays to financial institutions for depositing funds with the ECB, is -0.5%. The negative rate is intended to induce banks to borrow money rather than deposit it in accounts with the central bank. The ECB is also providing other forms of incentive for eurozone members through an open-ended bond purchase program and concessional financing for European banks..
ECB Banking Supervision Press Conference – 28 January 2021
Before the Fed’s decision, market expectations on Monday were to cut rates by 10 basis points at the April meeting of the ECB, and that with 65% probability this will be done already at the March meeting, Reuters reported. However, some analysts are still skeptical about this..
«We do not see the ECB rate cut as a likely policy response, although this option cannot be ruled out as the simplest of the compromises.», – noted analysts at Bank of America (BofA) on Tuesday.
Lagarde said in a statement on Monday that «The coronavirus outbreak is a rapidly evolving situation that poses risks to the economic outlook and the functioning of financial markets».
Lagarde also said that the central bank «keeps track of» the situation and that he is ready «take appropriate and targeted measures».
«The latest announcement by ECB President Christine Lagarde sent the strongest signal to date that the central bank is about to change its position and further ease monetary policy in response to the coronavirus epidemic.», – also said Dukroset of Pictet Wealth Management.
The Bank of England is also due to meet later this month, but Nomura analysts predict an emergency rate cut as early as this week.
«Thus, we have adjusted our view on … an extraordinary 25 bp rate cut. (base point) this week to give the Bank time to develop a plan for more targeted mitigation at the end of the month», – said two economists from Nomura on Tuesday in response to the Fed’s announced decision.
Outgoing Governor of the Bank of England Mark Carney said on Tuesday that the coronavirus could cause «extensive», but a temporary blow to the British economy. He also previously said the virus is already destroying tourism and manufacturing in the UK..
«The Bank of England is not at the center of the Covid-19 crisis, but it is one of the few large central banks left with significant political space.», – noted economists at Citik on Tuesday.
«However, there are also some reasons to believe that the Bank of England will wait a little longer and be slightly less aggressive than their industry peers.», – they said, stressing that the new governor should take office before the next policy meeting and that the UK’s exit from the EU creates some economic uncertainty.
However, most analysts expect a 25 basis point rate cut during this month..
American economist at Berenberg Bank, Kallum Pickering, also said the Bank of England could signal the start of a new bond buying program if economic risks continue to grow..
Central banks may be back in the spotlight, but some economists doubt their decisions could have a significant impact after a decade of loose monetary policy.
«In our opinion, the coronavirus and its impact on the economy require fiscal, not monetary policy», – said Carsten Brzeski, chief economist at ING Germany on Tuesday.
He added that «The ECB can do very little other than calm financial markets. Quite frankly, the vaccine will definitely help more than just another rate cut at this stage.».