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ECB does not have enough ammo to deal with outbreak

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Pledge: UK chancellor Rishi Sunak offered firms Covid-19 support in his budget yesterday. Photo: Bloomberg

Pledge: UK chancellor Rishi Sunak offered firms Covid-19 support in his budget yesterday. Photo: Bloomberg

Bloomberg

Pledge: UK chancellor Rishi Sunak offered firms Covid-19 support in his budget yesterday. Photo: Bloomberg

Perhaps it should have been no surprise the new head of the European Central Bank spent Tuesday urging leaders from the eurozone to loosen their purse strings, as there is little her own institution can do to offset the ravages of Covid-19.

To be sure, the ECB will act when it meets later today.

It will likely cut interest rates even deeper into negative territory, even though its rate policies are now at a level that risks magnifying economic threats rather than offsetting them.

A 10 basis point (0.10 of a percentage point) ECB rate cut will be aimed at curtailing the 6pc appreciation of the euro against the dollar since the US Federal Reserve unveiled its blockbuster half a percentage point rate cut.

If the ECB's Christine Lagarde and her chief economist, Philip Lane, can convince rate-setters this is a full-blown emergency, a really adventurous move could even see the bank start buying corporate bonds. And it could lend banks money essentially at zero rates, provided they lent that on to companies, so-called "targeted longer-term refinancing operations" - so as to ease financing constraints for troubled firms.

National banks like the Central Bank of Ireland could also step in, reducing the financial buffers that they require commercial banks to hold, although the CBI declined to comment on this issue when asked about it by the Irish Independent.

The reality is, however, that central banks, especially the ECB, have few options when it comes to helping to boost ailing economies.

Reinhard Cluse, the chief economist for Europe at investment bank UBS, says that the virus will push both Germany and Italy into a technical recession, which means two consecutive quarters of negative growth.

This means that the slow-growing eurozone will just scrape by this year.

"Given the risks related to Covid-19, we have cut our 2020 eurozone growth forecast to just 0.3pc from 0.8pc previously. For 2021, we now project 1.3pc growth, a marginal upgrade from 1.2pc previously," Mr Cluse said.

"As we have argued before, the heavy lifting in terms of policy response should come from fiscal policy, assisted by monetary policy - not the other way round," he said.

Even the mighty US Fed, which has far more room to cut interest rates and far more credibility than the ECB for its handling of the economic crisis, found that monetary policy alone simply was not enough.

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