What's going on?
The European Central Bank (ECB) announced it’d leave eurozone interest rates unchanged on Thursday – but it had a few special moves in its arsenal to help European banks combat coronavirus.
What does this mean?
Eurozone interest rates are already at record lows, so unlike the US Federal Reserve (the Fed) and the Bank of England (BoE), the ECB arguably had less flexibility to lower them than its global counterparts.
But the ECB did acknowledge earlier this week that, without urgent action, the bloc risks an economic shock reminiscent of the global financial crisis. The central bank’s actions, then, were focused on better equipping the region’s commercial banks to help prop up small businesses. It announced a fresh set of ultra-cheap loans available to banks that would, in turn, encourage them to lend more money to customers – as well as a new round of (private, rather than government) bond purchases (tweet this).
Why should I care?
For markets: Loan ranger.
Cheaper loans should in theory keep coronavirus-embattled companies from being caught out, and might even encourage firms to invest more when things start to settle down. And since that should eventually benefit those companies’ bottom lines, the idea is that investors see stocks as more attractive. But those investors don’t seem convinced the tried-and-tested strategy will be as effective this time around, which might be why they didn’t buy up stocks on Thursday. In fact, European stocks fell 10% – their biggest-ever single-day decline.
The bigger picture: Another cut?
The Fed will update its interest rate outlook again next week, when – according to analysts at TS Lombard – the central bank will follow last week’s cut with another, even bigger one. And while it’d be unlikely to have an immediate effect (last week’s didn’t), the prospect of a global economy awash with cheap cash when coronavirus dissipates – and all the rapid growth that could generate – might have some investors rubbing their (clean?) hands.