“Throw more wood on the fire” is the mantra that is reaching the European Central Bank (ECB) from all areas of world finance. This week, the ECB chaired by Christine Lagarde has an important role to play in the meeting with the institutions it supervises, which will not be easy to deal with. The European supervisor has no choice but to counteract the market situation – the crisis of the coronavirus and the oil war – with new weapons related to monetary policy.
The Spanish oil company Repsol suffered a 13% collapse on Monday, March 9th. BBVA, Santander, and Sabadell, on the other hand, gave up nearly 10%. The Ibex suffered its blackest day since Brexit.
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A measure that can help companies affected by the economic situation
The ECB is practically forced to take drastic measures and, as the helicopter money still seems to be a science fiction option, the rate cut becomes a way to alleviate the current tension.
That is a measure that would help companies affected by the challenging economic situation. It is also a solution that would end up taking the banking sector to an extreme situation, where there would be no room for them to continue on their own without a new wave of mergers. Spanish institutions have a major solvency problem, which has been exacerbated by this environment of negative rates and which has lasted longer than expected.
In addition, the Federal Reserve has lowered interest rates in the U.S. by 50 basis points. This was made to combat the risk of coronavirus outbreak on the U.S. economy. It did so last week in advance of the scheduled meeting. In Europe, the counterpart body has chosen to keep up appearances and decided to stick to the planned schedule. The ECB will meet this Wednesday, March 11th, and Thursday, March 12th. Christine Lagarde will explain the measures taken at a press conference.
The analysts’ vision of central banks to deal with the impact of the coronavirus
Experts hope Christine Lagarde will follow the example of Jerome Powell, president of the Fed. It is also assumed that the European Central Bank will provide liquidity through other measures. However, analysts warn that the supervisor has fewer options than other central banks to deal with the impact of the coronavirus.
According to Fidelity, the ECB “has less monetary ammunition to put in front of a considerable slowdown.”Along the same lines, Sergio Avila of IG Spain stressed that the ECB’s “toolbox” is “increasingly empty.” “With the reference rate at 0% and the deposit rate at -0.50%, its capacity for movement is much more limited,” he explained.
Philip Waechter says the ECB will not lower interest rates
On the other hand, Philippe Waechter, Head of Economic Research at Ostrum AM (Natixis), believes that the ECB will not lower interest rates because its main task “will not be to boost economic activity but to limit the risk of bankruptcy. The ECB could do that by increasing the purchase of corporate bonds and adding new elements to the conditional liquidity auctions (TLTRO), with the aim of adding more liquidity if necessary,” he added.
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First published in vozpopuli, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.
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