ECB Could Double Down On TLTROs To Combat Coronavirus Market Meltdown

The coronavirus crisis has hit economic sentiment hard, starting with an unprecedented sustained sell-off in financial markets followed by an emergency intra-meeting Fed funds rate cut of 50 basis points. The impact of the virus on the economy is expected to be significant and as yet unquantifiable, leading to a pledge from global Central Banks to provide financial aid.

When looking at the European Central Bank (ECB) their options for additional monetary stimulus are a lot more limited than those of the Fed. Having taken interest rates into negative territory and pumping more than 2.6 trillion euros into the economy in the last 5 years, their hands are pretty tied at a time when investors are demanding more policy support.

Given that cutting interest rates is easier to enact, it will probably be the first line of defence for the ECB in the coming days. But there are doubts about the effectiveness of such stimulus given that rates are already at record lows of -0.5%. This move could even lead to a reversal-rate, when monetary policy is perceived to harm rather than aid the economy, and some believe we are already there.

One way of injecting liquidity into the single-bloc, in an effort to boost growth and price pressures, is via Targeted Longer-Term Refinancing Operations (TLTROs). This new round of cheap financing would keep funds flowing in the economy in hope that the current market meltdown is not exasperated by a sudden shortage in lending.


Central banks have an unconditional predisposition to provide funding to banks that face a liquidity crisis. A method that has previously been used by the ECB to pump money in to the Eurozone economy is Quantitative Easing. QE involves a central bank buying government securities from the market to reduce interest rates and increase the amount of capital in the economy.

As the European Central Bank ended its four-year long QE programme at the end of 2018 with an expectation to increase rates in the following years, a change in the global economic landscape, led by a generalized slowdown in growth, has made the central bank re-think its monetary and fiscal policy strategies. The recent virus outbreak has just added more pressure to an already struggling financial system.

With growth forecasts revised lower at the beginning of 2019, the latest GDP growth forecast left figures unchanged, as the Eurozone (EZU) economy is now expected to grow 1.2% in 2020, continuing into 2021. But theses figures may have to be revised downward given the material impact the coronavirus is expected to have on worldwide economic development. Inflation, which is needed to control high levels of debt and has a target of 2%, has been revised downward, and is now forecasted to be 1.3% in 2020, compared to a 1.6% forecast in March 2019.

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