FRANKFURT AM MAIN, Germany – Dramatic action taken by the United States Federal Reserve and other central banks over the coronavirus outbreak has piled pressure on European Central Bank (ECB) chief Christine Lagarde to follow suit, but analysts warn she has little room left for maneuver.
Years of unprecedented stimulus have pushed the ECB’s easy monetary policy to its limits, just as markets are looking for reassurance in the face of a deadly epidemic that has unnerved consumers, disrupted air travel, and dented supply chains.
Facing her biggest challenge yet since taking the reins in November, Lagarde will chair a meeting of the ECB’s governing council next Thursday, March 12, with observers on tenterhooks for any announcements.
“It’s double or quits for the ECB,” said Ludovic Subran, chief economist at Allianz.
“Either they feel cornered by the Fed to act, or they sit this one out to leave room for fiscal measures and show they can remain above the fray.”
The Federal Reserve briefly jolted financial markets on Tuesday, March 3, with an emergency 0.5-percentage-point interest rate cut – its first since the 2008 financial crisis.
The central banks of Australia, Malaysia, and Canada have taken similar steps, while those in England and Japan have signaled more stimulus ahead.
Help is also coming from governments in major economies, with G7 finance ministers pledging to take fiscal action “where appropriate,” possibly in coordination with central banks.
Eurozone finance ministers have also promised to use all available tools to support growth.
The ECB has said it stands ready to “take appropriate and targeted measures as necessary” to deal with the virus’ economic impact.
But critics question how much more the Frankfurt institution can do.
“There is very little the ECB can do, besides calming financial markets,” said ING Diba analyst Carsten Brzeski. “It has run out of ammunition.”
Rates are already at record lows, and the bank only recently offered a fresh round of ultra-cheap loans to banks and revived a massive bond-buying scheme to boost growth and push up stubbornly low inflation.
The ECB faces “a real dilemma,” said Fritzi Koehler-Geib, chief economist at Germany’s KfW public investment bank, noting that “expectations are high” for some kind of response.
Several analysts expect the ECB to cut its deposit rate from -0.50% to -0.60%, making it more expensive for banks to park their excess cash in the hopes of encouraging lending.
Or it could opt to tweak its “TLTRO” bank-lending scheme, for instance by offering more generous terms to banks who give loans to smaller businesses, seen as vulnerable to coronavirus upheaval.
The ECB could also ramp up its purchases of government and corporate bonds, currently set at a pace of 20 billion euros ($22.3 billion) per month – although Allianz’s Subran believes this may happen later in the year “as the ECB will want to keep some powder dry.”
The ECB will next week also unveil its latest projections for economic growth and inflation – largely based on data from before the worst of the coronavirus.
Former IMF chief Lagarde is likely to use next Thursday’s press conference to again urge eurozone governments to play their part in shoring up the economy.
There are signs that capitals in the 19-nation club are listening.
The German government, often criticized for hoarding fat budget surpluses, has indicated it is ready to shield Europe’s top economy from the virus fallout.
Finance Minister Olaf Scholz has said Berlin “has the means” to unleash billions in public spending, while Economy Minister Peter Altmaier raised the prospect of helping companies with tax relief.
Although analysts are quick to point out that Lagarde is not an economist by training and lacks the technical expertise of past ECB chiefs, she is known as a skillful and well-connected politician.
That could put her in the right place at the right time, said KfW’s Koehler-Geib.
“The timing is right for Ms Lagarde as head of the ECB…because the room to maneuver is increasingly limited for monetary policy and other policy areas are becoming more important.” – Rappler.com