ECB decides in favor of keeping rates unchanged despite the Coronavirus emergency

In its policy meeting on Thursday, the European Central Bank (ECB) decided in favor of keeping rates unchanged despite the Coronavirus emergency wreaking havoc on the global economy.

President of the ECB, Christine Lagarde, said that the policymakers are in favor of resorting to other measures to promote bank lending. As part of such a strategy, Lagarde announced a €120 billion worth of expansion in the ECB’s asset purchase program.

BoE And U.S Fed Recently Opted For An Emergency Rate Cut

Market expectation was set at 10 basis points of a rate cut from the ECB on Thursday to add the fiscal stimulus directed at disabling the health emergency from pushing the regional economy into recession.

In the past few days, the Bank of England and the U.S Federal Reserve have already opted for an emergency rate cut to tackle the economic impact of the Coronavirus outbreak.

ECB’s main rate is currently at -0.5%. The negative rate promotes banks to lend money rather than piling it up at the central bank. According to the experts, ECB’s strategy differs from other central banks as the already negative rate puts a constraint on its toolkit.

Economist Holger Schmieding’s Comments On ECB’s Decision

According to economist Holger Schmieding of Berenberg:

“Contrary to expectations, the ECB did not cut its deposit rate more deeply into negative territory. Instead, the ECB will buy more assets with a focus on private sector bonds and inject even more liquidity at even more favorable terms into the banking.”

The Coronavirus that originated in Wuhan, China is spreading rapidly across borders with multiple European countries now reporting several confirmed cases of the virus. All in all, the virus has infected over 1,25,000 people worldwide and caused over 4,500 deaths. One of the largest European economies, Italy, currently has the most Coronavirus cases outside of mainland China. The country, at the moment, has resorted to nationwide lockdown to contain the spread of the virus.

The EUR/USD currency pair climbed to 1.1300 level following the ECB’s decision from a low of 1.1220. The gain, however, was reported largely unsustainable as the currency pair dropped around 175 pips after ECB’s press conference to 1.1130 level. At the time of writing, the currency pair is trading at 1.1165.