Daily Management Review

ECB, Fed announce additional stimulus measures


The ECB, at its scheduled meeting on Thursday, March 12, kept all rates at the same level, but announced an additional asset repurchase of € 120 billion; the Reserve Bank of New York, in turn, announced large-scale programs for providing short-term liquidity. Thus, the regulators are trying to overcome the effects of panic in the financial markets due to the coronavirus pandemic and restrictions on entry into the United States. Experts consider the current monetary easing insufficient and expect the Fed to lower rates next week.

The ECB has kept all three key rates at the same level (base - 0%, margin - 0.25%, on deposits - minus 0.5%), but this year it will increase the purchase of assets by € 120 billion (now the regulator buys bonds by € 20 billion monthly). The repurchase of assets will continue as long as required, the regulator said. However, there will still be injections of liquidity, but targeted ones. Thus, the ECB announced additional temporary operations for long-term refinancing (LTRO) lending to small and medium-sized businesses, for access to them it will only be necessary to reduce the portfolio of such loans. However, Head of the bank, Christine Lagarde, said that “monetary authorities cannot cope alone with the consequences of the fight against coronavirus - governments must take coordinated measures.”

The reaction of the US Federal Reserve again turned out to be more pronounced on Thursday - the regulator unexpectedly reduced the rate by 0.25 percentage points at an extraordinary meeting in early March, and now the Reserve Bank of New York announced the provision of short-term liquidity in the amount of $ 1.5 trillion to “make sure that the US government bond market is operating normally.” The bank also expanded the list of bonds that are redeemable (now $ 60 billion per month). Recall that on Monday, the required yield on ten-year securities fell to an incredibly low 0.318%, while back in mid-February it exceeded 1.5%. Market participants are waiting for the Fed rate cut at the next meeting on March 17-18.

Earlier on Wednesday, the Bank of England softened its monetary policy: the rate was immediately reduced by 0.5 percentage points - from 0.75% to 0.25%. The new budget of the country, in turn, includes an investment plan of $ 39 billion to overcome the shock associated with the spread of coronavirus.

New measures should compensate for the negative consequences associated with the assignment by WHO of the outbreak of coronavirus pandemic status and the subsequent 30-day ban on entry into the US from European countries (with the exception of Great Britain and Ireland). However, as Capital Economics notes, although the ban itself carries only limited losses, costs will increase as new restrictions are announced — schools are closed, public events are banned, etc. This could lead to a slowdown in the second quarter and stagnation in the third, the center’s experts believe.

source: ft.com, reuters.com