The ECB’s Governing Council is meeting this week and expectations are high after the US central banks unexpectedly cut interest rates by 50 basis points, but the ECB does not have much room to react. Now the restrained policy of recent years is taking its revenge.
The spread of the corona virus is currently feeding concerns that the already weak European economy will be further affected. The EONIA forwards are already pricing in a further 10 basis point cut in the deposit rate. Even if a rate cut at the March Council meeting cannot be ruled out in principle, the benefits would be rather limited in the current environment. In order to ensure the stability of the financial system, liquidity measures make more sense. The central bank could therefore decide on a new edition of the one-year LTRO (1J-LTRO). With regard to the bond purchase programme, the ECB is likely to act pragmatically and concentrate its purchases primarily on market segments suffering from spread widening (corporate and peripheral bonds). A fundamental increase in the monthly purchasing volume entails the risk that the central bank will more quickly come into conflict with the self-imposed limits (issue/issuer limit) and thus trigger a fundamental discussion, which would not be helpful at the present time.