The buildings of the banking district are photographed through raindrops on a window in Frankfurt, Germany, Tuesday, March 10, 2020. (AP Photo/Michael Probst)

European Central Bank offers stimulus to offset virus impact

March 12, 2020 - 8:57 am

FRANKFURT, Germany (AP) — The European Central Bank is deploying new stimulus measures to cushion the economic pain inflicted by the virus outbreak.

The central bank decided Thursday to buy up 120 billion euros more in bonds, money that is newly created and injected into the financial system.

It is also providing additional cheap, long-term loans to banks to make sure they have the liquidity needed. And the ECB will temporarily ease some of its capital requirements for banks to help them keep lending.

The bank did not cut interest rates as many analysts had expected. Rates are already low and economists have said deeper cuts might not help much.

It's all aimed at helping businesses get the financing they need and stimulating activity to offset the downturn from all the closings and restrictions due to the virus outbreak.

Some economists say the 19 countries that use the currency could be facing a recession this year.

THIS IS A BREAKING NEWS UPDATE. AP's earlier story follows below.

The European Central Bank is expected to announce new measures to cushion the economy against the disruption from the virus outbreak when its top officials meet Thursday.

The central bank for the 19 countries that use the euro could lower a key interest rate farther below zero, ease access to cheap credit, and increase its purchases of bonds.

The decision looms as the eurozone is forecast to slide into recession and financial markets keep falling over concerns about the virus outbreak's hit to the economy. Concerns deepened after the U.S. decided to halt travel from 26 European countries.

The bank's policy meeting without several members of the 25-seat governing council physically present and participating by remote conferencing. Italian central bank head Ignazio Visco is among them since his country, so far the hardest hit in Europe by the virus outbreak, has restricted movement. The central bank governors of Portugal, Latvia, Lithuania and Estonia are also taking part by remote.

Key measures the ECB could take could include lowering the benchmark rate for deposits from commercial banks to minus 0.6% from minus 0.5%. The negative rate is aimed at pushing banks to lend excess funds rather than pay the penalty rate by leaving them overnight at the central bank.

Another step could be to offer cheap credit to banks on the condition they lend to the small- and medium-sized businesses that could face interruption from closures and lack of parts deliveries due to the coronavirus outbreak.

That could take the form of easing conditions to existing long-term credit offers, or a new credit offer primarily aimed at small- and medium-sized business. Yet another measure could be to increase monthly bond purchases with newly printed money from 20 billion euros per month to 30 billion or 40 billion euros, and to shift the purchases more toward corporate bonds.

Economists are saying that the impact of the virus outbreak is difficult to address with monetary policy, since it first and foremost deals a shock to the supply of goods and services. Monetary policy is better equipped to stimulate demand, not supply, by making credit more widely available.

Central bank action would be aimed at limiting the damage from knock-on effects of business interruption. More abundant and targeted credit could help businesses get through a period of interruption without going out of business.

“None of these monetary measures will stop the spread of the virus,” said economist Florian Hense at Berenberg bank. “But they are among the best measures to prevent the economic damage being even more severe in potential second-round effects.”

The Bank of England cut its key benchmark to 0.25% from 0.75% on Wednesday; the U.S. Federal Reserve cut its benchmark by a half-percentage point to 1.0-1.25% on March 3.

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