By Laurie Laird
LONDON (MaceNews) – The European Central Bank expanded its emergency liquidity program following Thursday’s governing council meeting, but declined to reduce interest rates, despite the eurozone suffering its biggest-ever downturn in the first quarter.
“We are facing an economic contraction of a magnitude and speed … unprecedented in peacetime,” said ECB President Christine Lagarde, addressing the media on a conference call after the governing council’s first-ever virtual meeting. Under the most “severe scenario,” gross domestic product could plunge by 15% between the first and second quarters, suggesting a full-year contraction of between 5% and 12%, she added.
Eurozone GDP fell by 3.8% in the first quarter, the biggest slump since the series began in 1994, a downturn more severe than during the financial crisis. By contrast, U.S. output declined by 1.3% between the first and second quarters, or by 4.8% at a compound annual rate, a more shallow retreat than 8.4% fall recorded in the final months of 2008.
Despite that, the ECB declined to reduce interest rates, which were largely below zero before the shock of Covid-19 hit the region’s economy. The deposit facility remains at -0.5%, with the refinancing rate at 0.0%.
The central bank did announce a new pandemic emergency longer-term refinancing operation, or PELTRO, to begin in May, which will provide capital to banks at a rate of -0.25%. The ECB also reduced the interest rate on its previously-announced targeting longer-term refinancing operations (TLTRO III) to as low as -1.0%.
Lagarde defended the governing council’s decision to leave rates on hold, even as the Federal Reserve and the Bank of England have slashed lending rates to record lows. “We believe that we have the combination as a package to address” the current downturn, she said, stressing the below-zero rates on refinancing operations. But the governing council will continue to “make full use of the flexibility that is embedded … in our policy tool kit,” a suggestion that further rate cuts are not completely off the table.
That flexibility could extend to expanding the quality of securities purchased through quantitative easing. When asked whether the ECB might consider including sub-investment grade bonds as part of its asset purchase program, Lagarde stressed that the governing council “will adjust as and when needed,” although members have not discussed “any change to the eligibility framework at this point in time.”
The ECB president took a decidedly more cautious outlook toward the economic outlook than government officials on the west side of the Atlantic. “We still do not have clarity over the course of the pandemic … we cannot tell at what speed [it may unfold] or what may be the scale of it. That makes the job of forecasting extremely difficult.”