By Laurie Laird
FRANKFURT (MaceNews) – The European Central Bank defied market expectations by declining to move its main deposit rate further into negative territory to combat coronavirus-induced slowdown, but did announce a dramatic expansion of its quantitative easing program on Thursday.
That puts the ECB out of step with other major central banks, following an emergency half-point cut by the Federal Reserve last week and a similar move by the Bank of England on Wednesday. President Christine Lagarde defended the ECB’s announcement, stressing that “the unanimous decision reached [by the ECB] today was clearly determined by the fact that we have the most efficient and most balanced” set of monetary tools.
The ECB’s governing council will provide a “temporary envelope” of additional net asset purchases of euro120 billion per month until the end of 2020, on top of the euro20 billion program unveiled in September under Lagarde’s predecessor, Mario Draghi. The September move, which accompanied a 10 basis point reduction in the ECB’s main deposit rate to -0.5%, was bitterly and publicly opposed by a number of northern European central bank officials.
However, President Lagarde would not be drawn on whether the ECB might be forced to adjust its ceiling on holdings of national debt stocks when ramping up bond purchases, saying only that the Bank “will make use of all the flexibilities that are embedded in the asset purchase program.”
With investors expecting an ECB rate cut, Thursday’s decision provided a brief lift to the euro, but Lagarde downplayed the risk of competitive currency devaluations as a result of policy discord between the ECB and other central banks. “We do not determine [policy] on the basis of the currency valuations,” she said. “The key issue is to face the fundamentals of the economy … and to make sure the liquidity risk does not materialise.”
When pressed on the ECB’s decision not to reduce rates in line with other central banks, Lagarde stressed Thursday’s announcement that the Bank’s “massive targeted refinancing” will provide loans at 25 basis points below the EBC’s main deposit rate. “I’m not sure that you can so much rival with that at the moment,” she said, adding that “comparisons are odious.”
Lagarde also sharpened her call for the European Commission and national governments to accelerate spending plans to combat an economic downturn. “What worries me is the complacency and slow motion process that could be demonstrated by the fiscal authorities of the euro zone,” she said.
European share indices were nursing falls of more than 5% as Lagarde took to the podium, raising comparisons with Mario Draghi’s 2012 pledge to “do whatever it takes” to save the euro during the eurozone’s sovereign debt crisis. “I don’t have a claim to history” when it comes to doing whatever it takes, she said.