ECB in fresh push to lend to banks at ultra-low rates

The European Central Bank has expanded its loans to banks at ultra-low rates after data published earlier on Thursday showed the eurozone’s economy shrank by the fastest rate on record in the first quarter.

In a move to bolster the European banking system’s access to funds and to avoid a drying up of credit, the ECB said it would lend money to banks at rates as low as minus 1 per cent through a planned programme and also launched a separate round of fresh lending.

The ECB’s governing council said it was “fully prepared” to increase the size of its recently launched €750bn pandemic emergency purchase programme and to “adjust its composition, by as much as necessary and for as long as needed”.

The central bank’s 25 governing council members conducted a scheduled monetary policy meeting by teleconference for the first time on Thursday.

In a statement published after the meeting, the council said a new series of seven non-targeted pandemic emergency longer-term refinancing operations (PELTROs) would be launched in May “to support liquidity conditions in the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop”.

Christine Lagarde, ECB president, said the eurozone was facing an economic contraction that was “unprecedented in peacetime”, and noted the “profound deterioration in labour conditions”, adding that consumer sentiment indicators were in “freefall”.

ECB growth projections suggest the eurozone economy could contract by between 5 and 12 per cent this year depending on the success of coronavirus containment measures, she said.

Ms Lagarde said the central bank was “fully committed to doing everything possible within its mandate to support every citizen of the eurozone”. But she warned eurozone governments that “an ambitious and co-ordinated fiscal stance is critical” as well.

The new PELTROs will allow banks to borrow at minus 0.25 per cent, in effect paying them to borrow money. The ECB also said it would lend money to banks from June as cheaply as minus 1 per cent via its previously announced round of targeted longer-term refinancing operations (TLTROs). These incentivise lending by requiring banks to hit certain targets before they get the lowest rate.

By lending to banks at a rate below the one it offers on deposits, the ECB has become the first major central bank to operate such a dual-rate system, which in effect subsidises banks.

The new measures were announced a few hours after new data showed that gross domestic product in the eurozone fell by 3.8 per cent in the first three months of the year. This is the largest drop since the series began in 1995, and a deeper drop than the worst of the financial crisis.

The ECB kept its main deposit rate on hold at an all-time low of minus 0.5 per cent on Thursday, and stuck to its plan to buy more than €1tn of assets this year to shore up financial markets and keep borrowing costs low for households, businesses and governments.

The decision follows a similar move by the US Federal Reserve on Wednesday and indicates that major central banks have decided to pause and take stock of the many ultra-loose monetary policy measures they have launched in response to the coronavirus crisis.

The pandemic is expected to trigger the worst recession in the global economy since the Great Depression of the 1930s, but the ECB’s measures have so far helped to prevent the healthcare emergency and sharp economic downturn from spiralling into a fresh financial crisis in the eurozone, where many banks have still not fully recovered from the 2008 crash.

The ECB has already given banks up to €3tn of ultra-cheap liquidity and more than €120bn of capital relief.

Equally worrying for the ECB, the risk of Europe’s economy entering a deflationary spiral increased as falling energy prices dragged eurozone inflation down from 0.7 per cent in March to 0.4 per cent in April.

That is the bloc’s lowest level of price growth for almost four years and is far below the ECB’s inflation target of just below 2 per cent. Spain, Greece, Slovenia and Finland all reported falling consumer prices.

Kenneth Wattret, chief European economist at IHS Markit, said the ECB was “keeping some of its powder dry” and added that “liquidity measures are always the least contentious area if the intention is to give the impression of doing a lot”.

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