ECB fires a blank: Shares go further into freefall after Lagarde says ‘non’ to rate cut
Christine Lagarde, president of the European Central Bank, dashed hopes of an interest rate cut to fight the economic effects of the coronavirus, sending shares further into freefall yesterday.
Germany’s DAX index and the Paris CAC 40 were both down nearly 10 per cent, in line with steep drops on the FTSE 100.
Screens had already turned red after President Trump banned all travel flights from continental Europe for 30 days.
Germany’s DAX index and the Paris Cac 40 both fell nearly 10 per cent, in line with steep drops on the FTSE 100, after Christine Lagarde dashed hopes of an interest rate cut
The ECB had been expected to reduce borrowing costs but in the event it kept the main interest rate on hold at a record low of minus 0.5 per cent.
‘Despite high expectations, Lagarde failed to deliver what many market participants were expecting: interest rates remained unchanged at minus 0.5 per cent, a move which widely disappointed markets,’ said David Zahn, of the asset manager Franklin Templeton.
Lagarde, a former head of the International Monetary Fund, did launch a package of measures to protect the eurozone.
These include further quantitative easing money printing and a programme of cheap loans to banks to encourage them to carry on lending to small businesses.
The ECB also said it would relax capital requirements on banks temporarily so they would be able to lend more to crisis-hit customers.
Coronavirus is the first major test for Lagarde since she took the job late last year.
The ECB has less freedom than its British and American counterparts to cut rates. This is partly because borrowing costs are already negative and partly due to the German fixation with sound money and a terror of inflation.
The European response fell short of the huge co-ordinated effort by Chancellor Rishi Sunak, along with departing Bank of England governor Mark Carney and his successor Andrew Bailey.
UK interest rates were slashed by half a percentage point to 0.25 per cent and the Budget set out £30billion of crisis support.
The eurozone is facing a major meltdown as Italy, its third largest economy, has placed its population in lockdown and swathes of activity have ground to a halt.
The country’s banks were already fragile, and even before coronavirus analysts feared Italy could be the epicentre of a fresh eurozone debacle.
It is buckling under more than £2trillion of debt. Its woes are likely to fan out across the rest of the continent and beyond as policy- makers fear the pandemic could trigger a global recession.
Oliver Blackbourn, a fund manager at Janus Henderson, described the ECB as ‘on the edge of exhaustion but still trying’.