ECB Watchers Are Split Over Lagarde’s Response to Virus Crisis

08 Mar 2020, 12:01 PM IST

(Bloomberg) -- Economists are torn whether the European Central Bank will unleash monetary stimulus next week to join their peers in fighting the biggest shock to the global economy since the financial crisis.

Even after central banks across the world took action to pre-empt fallout from the coronavirus outbreak, some 60% of those surveyed by Bloomberg predict ECB policy makers will refrain from lowering interest rates, with the rest predicting a cut.

Respondents are similarly split over the pace of monthly asset purchases, a key tool to support the economy: While the majority sees no change, some predict buying will double. Officials are also seen potentially offering more generous terms on their long-term loans to banks.

ECB Watchers Are Split Over Lagarde’s Response to Virus Crisis

The division among economists highlights one of the ECB’s biggest conundrums: After nearly six years of negative interest rates and more than 2.6 trillion euros ($2.9 trillion) of bond-buying, euro-area policy makers have less room than other central banks to ringfence the economy. Yet investors are betting there’s an 85% chance of a deposit-rate cut.

President Christine Lagarde’s challenge is to find an effective response that will help companies struggling with disrupted supply chains, factory closures and travel restrictions -- without completely exhausting all remaining options. Her promise to find “appropriate and targeted measures” suggests policy makers will be ready to announce at least some smaller decisions following their meeting on Thursday.

“Next week’s meeting will be the first test case for Christine Lagarde and her communication skills,” said Carsten Brzeski, chief German economist at ING in Frankfurt. “The more general challenge for the ECB is that it actually would like to stay on hold, knowing that no single additional monetary easing will cure or stop the virus.”

The fallout from the epidemic is starting to seep through the economy. Euro-area factories are suffering widespread delivery delays and steep declines in foreign orders, and the European Commission has warned the outbreak threatens to plunge France and Italy into recession. The outlook for Germany, where manufacturing has been in a downturn for more than a year, isn’t much better.

Almost all survey respondents predict the ECB will cut its growth forecast for 2020. Economists see a 40% chance the euro area will be in recession this year, and most predict a rebound from the epidemic to get under way only in the third quarter.

Following next week’s policy decision, Alastair Winter, an economic adviser to Global Alliance Partners, expects to hear “lots of reassuring words concealing little scope for action.”

The ECB’s policy rate, at minus 0.5%, is already the second-lowest in the world, and side effects have started to show -- so much so that even some of the biggest proponents of loose monetary policy have signaled they would be critical of another cut.

What Bloomberg’s Economists Say
“We expect President Christine Lagarde to deliver a 10 basis point cut on March 12, together with measures to support lending as the coronavirus shock hits. The ECB can’t prevent the euro-area economy from shrinking, but signaling a willingness to act is essential.”

-- Maeva Cousin, David Powell and Jamie Rush. See the ECB PREVIEW

“Any action would only be an attempt to show that the ECB is still able to act,” said Alexander Koch, an economist at Raiffeisen in Zurich. “It wouldn’t achieve anything.”

Even so, economists do expect a rate cut in the first half of this year -- a move they predict will be reversed in 2021.

With inaction not really an option after the Federal Reserve slashed rates this week and central banks from South Korea to Canada followed suit, the ECB might choose to focus its efforts on funneling money into the economy.

One option is to redesign or amend its program of long-term loans for banks to include incentives for lending to smaller businesses. Economists in the survey predict financial institutions will take out 90 billion euros at the end of the month, and another 470 billion euros in the following four quarterly offerings.

Yet regardless of the size of the ECB move, it will probably come with a pointed message to euro-area governments to take the lead in propping up the economy.

“Since the ECB’s means are limited anyway, the call for a more active role of fiscal policy will become even louder,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt.