To Take On Coronavirus, B.O.E. Cut Rates. Europe’s Central Bank Has Fewer Options. - The New York Times

  • 14 March 2020
Business|To Take On Coronavirus, B.O.E. Cut Rates. Europe’s Central Bank Has Fewer Options.

Christine Lagarde, the bank’s new president, is facing her first big crisis. She doesn’t have much room to maneuver.

Credit...Ralph Orlowski/Reuters

The Bank of England launched an unexpectedly powerful attack on the economic effects of the coronavirus Wednesday. Now it’s the European Central Bank’s turn.

Christine Lagarde, the European bank’s new president, is under intense pressure to take action after the virus outbreak shut down Italy, the eurozone’s fourth-largest economy, and showed signs of spreading rapidly to Germany, France and other members of the bloc.

The E.C.B.’s Governing Council began meeting Wednesday and on Thursday is expected to announce anti-crisis measures that could look a lot like the ones announced by the Bank of England.

The British central bank said Wednesday that it would cut its main interest rate, provide incentives for commercial banks to lend to small and medium-size businesses, and temporarily authorize banks to take more risk so that they can lend more.

The breadth and size of the Bank of England’s measures, after aggressive action by the Federal Reserve, add to the pressure on the E.C.B. to follow suit.

The stakes are as high as they have been since the financial crisis of 2008. The rapid spread of the coronavirus in Europe has pushed the eurozone’s already wobbly economy toward recession.

But there’s one big problem. The E.C.B. has been in nearly nonstop crisis mode since 2008, and it has few cards left to play.

It cannot, for instance, slash interest rates as much as the Federal Reserve and Bank of England. Both cut their main rates by half a percentage point, a significant move. The E.C.B.’s main interest rate, the one it charges commercial banks for short-term loans, is already zero. It can only tinker with a secondary rate that is already negative.

Ms. Lagarde’s credibility, a central banker’s stock in trade, hangs on how she handles the crisis with the limited resources at her disposal. The burden on her may be especially heavy because she is the central bank’s first female president.

She has signaled that she understands the urgency of the situation. She told European Union leaders on a conference call late Tuesday that the situation could become as bad as 2008 if governments do not act decisively enough, according to a person familiar with her remarks. The call was first reported by Bloomberg News.

Angela Merkel, the German chancellor, acknowledged during a news conference on Wednesday that Ms. Lagarde had warned of the virus’s consequences. Ms. Merkel said she took Ms. Lagarde’s view of the situation “very seriously.”

But Ms. Lagarde has not committed the E.C.B. to specific measures before the members of the Governing Council have had a chance to debate them, so there remains uncertainty about what they will decide.

Ms. Lagarde is no stranger to crises. As managing director of the International Monetary Fund, she was deeply involved in the eurozone rescue plan in response to the Greek debt meltdown in 2010. But she has no experience as a central banker and, unlike her predecessor, Mario Draghi, does not have a doctorate in economics.

What Ms. Lagarde says at a news conference Thursday may be just as important as what the Governing Council decides. She must allay fears that the central bank is out of ammunition and powerless to calm financial markets.

That won’t be easy. When the Fed cut its benchmark rate by 0.5 percentage points last week, the market rally afterward lasted all of 15 minutes. The E.C.B. has much less room to maneuver than its American counterpart, and the crisis has only grown worse since the Fed acted.

Here’s a look at some of Ms. Lagarde’s limited options:

The E.C.B. is widely expected to cut the rate it charges banks to park money in its virtual vaults. The rate is already negative 0.5 percent, a de facto penalty on deposits that is intended to encourage commercial banks to lend their cash instead of hoarding it.

The Governing Council will probably cut the rate to minus 0.6 percent. A bigger cut is possible, but any move won’t affect the cost of money that much. The main purpose would be to lift financial market morale and show that the central bank is on the case.

Since 2016, with a brief intermission last year, the E.C.B. has been buying government and corporate bonds on the open market as a way of increasing demand, pushing down market interest rates and making it cheaper for governments and companies to borrow money.

On Thursday, the central bank may announce that it is increasing the size of the purchases, which amount to 20 billion euros, or $23 billion, each month.

One problem is that the central bank has already bought so many bonds that supply is running low. Florian Hense, an economist at Berenberg Bank, suggests that the central bank could solve that problem by raising its self-imposed limits on how much of a given bond issue it buys, and tilting its purchases toward corporate bonds, which are more plentiful.

The central bank is also widely expected to expand an existing program that allows commercial banks to borrow newly created money at a negative interest rate, if they lend the money to eurozone businesses. The central bank could tailor the program so that the money flows to small businesses like restaurants, hotels or stores that are suffering the most as Europeans avoid leaving their homes.

The Bank of England took that step on Wednesday, introducing a program that provides commercial banks with incentives to lend to small and medium-size enterprises.

“None of these monetary measures will stop the spread of the virus,” Mr. Hense said in a note to clients Tuesday. “But they are among the best measures to prevent the economic damage being even more severe.”

The E.C.B. could use its power over bank regulation to temporarily reduce restrictions on capital — how much of banks’ own money vs. borrowed money they are required to use when doing business. That would give commercial banks more leeway to issue loans.

The Bank of England adopted this strategy Wednesday, allowing British banks to deploy capital they are required to keep on hand for emergencies.

Of course, the reason the restrictions on capital exist is to prevent banks from taking too much risk and getting into trouble in a crisis. That’s a chance worth taking, argues Ignazio Angeloni, a former high-ranking official at the European Central Bank.

“Normally, supervisory forbearance is bad,” he wrote on the website of OMFIF, a research organization. “But this is not a normal situation.”

There is a remote chance that the E.C.B. will surprise markets with some new measure. For example, the bank could deploy so-called helicopter money. It could print money and distribute it directly to Europeans to avert a depression. Such a shocking departure from precedent is highly unlikely unless the situation gets much worse.

A faction on the central bank’s Governing Council argues that monetary policy has already gone too far, that a decade of very cheap money has fueled asset bubbles and set the stage for a financial crisis. Some members of the council may resist taking further action until it’s more clear how widespread the economic damage from the coronavirus will be.

Doing nothing is probably not a realistic option. If Ms. Lagarde on Thursday says only that the E.C.B. is monitoring the situation closely and will announce policy moves when it meets again at the end of April, the disappointment in financial markets could be profound.


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