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Spot analysis

ECB gives generously, but leaves interest rates unchanged

Dr. Thomas Gitzel, Chief Economist VP Bank Group
Reading time: 3 Min
The European Central Bank (ECB) is trying to play its part in the coronavirus crisis management. It will increase its existing securities purchase programme by an additional EUR 120 bn by the end of the year. The purchase of corporate bonds is expected to play a large part in this.

In addition, further long-term refinancing transactions will be launched. The banks will receive full allotment, i.e. they will receive the amount they need. The interest rate they pay corresponds to the average deposit rate, which is negative. That means banks can borrow as much money from the ECB as they want and get paid for it. These measures serve as a bridge until the next targeted long-term refinancing transaction is ready in June 2020.

Banks will then receive money at -0.25%. Those who leave their lending conditions unchanged in view of the difficult economic situation will even receive a discount of 25 basis points on the average deposit rate. In this case, the commercial banks thus receive 75 basis points.

What the ECB has not done, however, is to further reduce the deposit rate. The central bankers have probably come to the end on the interest rate side - this is what they signal with the unchanged deposit rate. That is good, because even lower interest rates would have more negative than positive effects. It should also be borne in mind that the ECB is reviewing negative interest rates as part of the revision of its monetary policy strategy.

Less means available

Christine Lagarde, the head of the ECB, certainly imagined her first months in office differently. The coronavirus puts the Frenchwoman before her baptism of fire. But the ECB's arsenal is no longer too full. As much as the central banks are currently trying to play their part in crisis management, even lower interest rates and even more government bond purchases will only have limited economic benefit. The most effective instruments must now be used.

It is right that the ECB wants to buy more corporate bonds. This has a direct, positive impact on corporate financing. Lagarde is also very generous to the banks with the announced long-term refinancing operations. It is surprising that the markets have been so disappointed by these measures.

At the media conference, Lagarde again made it very clear that a coordinated fiscal policy is now needed. We fully agree with the ECB head. Monetary policy can only provide limited support - even if the ECB is going further than almost all other central bank have so far. Small and medium-sized companies in particular need access to liquidity now. Due to strict regulations, the banking sector cannot help in all cases. The ECB's decision to relax regulations on banks' capital ratios is therefore the right one. But once again: it will not work without government support.

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