JAKARTA (TheInsiderStories)– IHS Markit expects the European Central Bank (ECB) to announce yet another package of easing measures on March 12. This is likely to include an enhancement of liquidity provision, a 10 basis points deposit facility rate (DFR) cut, and a modest increase in the monthly pace of net asset purchases (probably around EUR20 billion).
We see a risk, however, that the ECB might fall short (temporarily), disappointing market expectations. Either way, even a wide-ranging package of measures will make little difference to the near-term fall-out on the economy from the spread of the COVID-19 virus. At best, it will mitigate some of the financial market spillover effects.
Italy, which is effectively already in recession, will bear the brunt of the damage in the near-term. But the multiple transmission channels of this shock suggest the eurozone overall is likely to follow into recession in coming quarters.
Given this backdrop, we doubt that the pressure on the ECB to ease further will diminish quickly even if a range of measures is announced shortly.
Commentary from the European Central Bank (ECB) has shifted markedly in tone recently given the spread of the coronavirus disease 2019 (COVID-19) virus and the potential economic and financial fall-out. The initial scepticism over the questionable effectiveness of monetary policy in the current circumstances has been superseded by an eagerness to demonstrate a willingness to act, reflected in the ECB’ unusual decision to publish a statement by president Christine Lagarde on March 2.
As the situation is indeed fast moving, policy options have been left open. Still, the references to “appropriate and targeted measures” are noteworthy. The statement could have repeated the mantra that the ECB “continues to stand ready to adjust all of its instruments”.
That it did not suggests some reluctance to deploy all tools, probably reflecting the reluctance of some Governing Council members to sign up to additional unconventional measures and uncertainty about their effectiveness, with fiscal stimulus seen as a more appropriate response.
The term “targeted” hints that liquidity assistance will be prominent, with the ECB likely to make some enhancements to its “targeted long-term refinancing operations” to account for the severity of the shock to parts of the eurozone (including small businesses).
The broader question is whether the ECB will stop at just liquidity measures. We think it cannot afford to take the risk. Some dyed-in-the-wool hawks on the Governing Council will argue against additional unconventional measures, making the point that monetary policy is not best placed to deal with a supply shock. A majority should favor a different approach, however, driven by concerns about the implications of not doing enough, quickly enough.
We acknowledge the risk that the ECB might only respond to the shock in stages, given the lack of economic evidence available and internal divisions. But an adverse market reaction to falling short would force the ECB to take more radical steps subsequently.
by Ken Wattret, Chief European Economist, IHS Markit