ECB botches a policy opportunity

The ECB delivered a five-part statement this morning on how it will react to the spread of the coronavirus and policies to contain it; the drop in oil prices and the dislocations it causes in producing countries; and the general financial market distress.

Up front, we will say that we are disappointed. All the measures boil down to one tactic—further increases in liquidity. In our view, the Eurosystem is already more than amply reserved with six-times minimum reserve requirements on hand across institutions.

Increasing already excess reserves by repos and asset purchases, making them even more excessive, will not induce new lending.  Banks cannot lend more because they are too close to the minimum ratio of assets at risk to capital reserves. New lending will just push them over the top. Leaving interest rates and the reinvestment commitment unchanged will, obviously, leave monetary conditions unchanged.

Market participants should be at least as disappointed by the ECB’s decision as it was by the U.S. administration’s embarrassing policy statement last night. This is shaping up to be a really bad day for financial markets, made worse by another botching of a policy opportunity by the ECB.

To see more insights from Carl Weinberg, request a free trial of Notes on the China’s Economy.