ECB under pressure to cut rate over coronavirus after Fed move

The European Central Bank (ECB) is under pressure to follow the US Federal Reserve and cut interest rates when it meets on Thursday, economists said. However, the Bank led by President Christine Lagarde (pictured), has less room for manoeuvre than its US counterpart since successive efforts to stimulate the eurozone’s anaemic economy has left its main bank rate at zero.
This key rate affects the cost of personal loans, credit card rates, as well as the price of loans and bonds to large corporations and small firms.
The Frankfurt-based ECB has already said it is tracking the “fast-developing” coronavirus outbreak.
The virus has grown into an outbreak that is disrupting global supply chains, slowing industrial activity, grounding flights and hitting financial markets.
However, the ECB will have to weigh up whether a sub-zero cut will only further panic investors. The Fed’s cut on Wednesday did initially boost markets, only to see them tumble by the end of the week.
Commerzbank expects the ECB to cut the deposit rate by 10 basis points and boost monthly bond buys by €20bn.
The German bank’s chief economist Joerg Kraemer said: “The ECB is likely to combine the interest-rate cut with an increase in the allowances in order to reduce the burden for the banks.”
Commerzbank also downgraded the region’s growth rate to 0.5 per cent, down from a previous forecast of 0.9 per cent.
However, other economists go further, forecasting the eurozone will slide into a recession in the six months to June — the first since the bloc’s sovereign debt crisis in 2012.
Economists at Dutch bank ING said a rate cut of 10 to 20 basis points is possible “if the situation deteriorates”, but makes it clear the decision rests on a knife-edge.
ING said: “The ECB opted against a coordinated move with the Fed, signalling that policymakers would prefer to wait-and-see until next week’s official meeting, and then try to steer markets with words rather than action.”
The ECB already restarted quantitative easing in November, at a rate of €20bn a month and the central bank’s balance sheet has now swollen to €4.7trn, or just over a quarter of the region’s gross domestic product.
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