• Joel

ECB Preview – Lagarde’s First Test

Updated: Mar 11, 2020

At 1245GMT/0645EST on the 12th of March, the ECB will release the result of their latest rate decision.

Market focus will be on what measures the bank will take to try and soften the impact of the Covid-19 on the Eurozone economy. Given that the Fed, BoE and BoC have all now cut rates by 50bps, the pressure is on the ECB to act. 10bps worth of rate cuts are expected to the bank’s overnight deposit rate.

Many desks see such a rate cut being accompanied by a more generous tiering system, but other targeted measures are also expected as a means of supporting companies hit by the virus.

“When it comes to the impact of the coronavirus, the general monetary policy tools may actually be rather blunt and for example China has cut the policy rates only slightly” notes Nordea. “Thus”, continues the bank, “the authorities have to find ways to alleviate directly the negative impact of a sudden stop on cash flows among corporates.” Two ways that the ECB could tackle the lack of financing could be an increase in the CSPP programme (where the ECB buys corporate debt, this would basically be more QE) or to add flexibility in the collateral requirements.

Moreover, sources stories from ECB officials suggest that the ECB is reportedly working on a possible generous long-term loan scheme aimed at SMEs hit by the coronavirus impact. It could resemble the targeted longer-term refinancing operations (TLTROs), only targeted towards SMEs. The terms for such operations would need to be sufficiently attractive to be effective.

Was the ECB still under the leadership of Mario Draghi, the ECB would very likely have joined the Fed last week, speculate ING, in “trying to demonstrate its ability and willingness to act”. The ECB under the leadership of Christine Lagarde, however, has looked less sensitive to financial market developments than it did under her predecessor caveats the bank.

Under Lagarde, there appears to have been a growing awareness of the adverse effects of the ECB’s unconventional measures, which appears to have lowered the likelihood of (or at least the willingness for) additional monetary policy easing.

The fact that the ECB opted against a coordinated move with the Fed, underlines this preference for wait-and-see. However, the short official statement offered on the ECB’s website, signalling that the ECB is willing to take ‘targeted’ action suggests that the ECB is not entirely against acting this week.

The latest round of staff projections will probably also get less attention than usual, as the cut-off date for the forecasts was some two weeks ago, just before the virus broke out in Italy. This means that the staff projections are unlikely to paint an accurate picture of the eurozone economy at the moment, besides some weaker demand from China and some supply chain disruptions. Importantly, the economic impact from the preventive measures taken in recent weeks (like the large-scale quarantines in Italy) to slow down or stop the virus from spreading in Europe will not have been considered in the staff projections.

Market Reaction

Should the ECB fail to act, for example, by not cutting its benchmark lending rate or if its targeted measures fail to impress the market, EUR will appreciate. If the ECB overdelivers, i.e. with larger a than expected cut, larger than expected increase to its QE programme or more generous than expected targeted operations, EUR will depreciate.


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