MNI PREVIEW: ECB Under Pressure To Follow Fed With Easing

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank is under pressure to follow the

Fed with an easing announcement at its meeting on Thursday, with sources telling

MNI that a package could contain a 10bps deposit rate cut and targeted loans for

firms hit by the economic impact of coronavirus.

     The ECB also has other tools at its disposal, including the possibility of

increasing asset purchases, and relaxing rules on collateral, but sources noted

last week that some Governing Council members were still arguing that monetary

easing was not an appropriate policy response. President Christine Lagarde has

said the ECB "stands ready" to take "appropriate and targeted measures" as

necessary.

     With a sliding oil price undermining inflation expectations, Chief

Economist Phillip Lane could also recommend a targeted ratcheting up of the

ECB's debt purchases (by something like EUR20-30 billion/month), including by

buying bonds eligible under the Corporate Sector Purchase Programme.

     Limits on purchases of bonds issued by individual eurozone governments

remain a constraint, and any moves to expand the field of eligible securities,

such as by lowering ratings requirements, would be controversial. The effect of

coronavirus is not likely to be captured by March's Eurosystem staff

macroeconomic projections, and some GC members hope the shock to the eurozone

economy from the outbreak will be relatively short-lived.

     Markets are pricing in a 10-basis-point cut in the ECB's deposit rate on

Thursday, to -0.6%.

     --EMERGENCY FED CUT

     In an emergency move, the Federal Reserve last week cut rates by 50bps,

with markets already expecting a further 75bp rate cut by the time the Fed meets

next week.

     As Lagarde acknowledged in a statement on March 2, the situation is "fast

developing" and unpredictable. The ECB may be careful to protect what firepower

remains to it, as it monitors the longer-term effects of measures taken in

attempting to contain the virus in countries such as Italy

     January's decision saw the President describe risks surrounding the euro

area growth outlook as remaining "tilted to the downside," but becoming "less

pronounced" as uncertainty surrounding international trade ebbed.

     Thursday's monetary policy decision will come a day after a meeting of the

Eurogroup of finance ministers, and ECB officials will hope that this could set

the scene for a fiscal response to the coronavirus, backing up any monetary

policy action.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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