FRANKFURT (Reuters) – European Central Bank policymakers feared a rapid deterioration of the euro zone economy amid the coronavirus crisis but were far from united when they approved emergency measures last month, the accounts of their late-night March 18 meeting showed.
With financial markets in meltdown and borrowing costs soaring for the euro zone’s weaker members, the ECB agreed at the meeting to discard many of its previous stimulus rules and buy up to 1.1 trillion euros ($1.2 trillion) of debt this year to help struggling firms and governments.
The move was a remarkable turnaround from just six days earlier, when the ECB agreed on a small increase in asset buys and ECB President Christine Lagarde played down the crisis, even arguing that it was not the ECB’s job to help “close spreads” between government bond yields.
That remark sparked the biggest daily jump in Italian borrowing costs since 2011 and drew fire from investors and even heads of states for what they saw as a lack of solidarity with countries fighting the virus.
The minutes of the March 18 meeting suggest that, even as some rich northern European nations remain sceptical of ECB stimulus, Lagarde continues to enjoy a comfortable majority on the bank’s Governing Council and most policymakers are willing to act decisively to preserve the euro.
But in the March 18 meeting, which was not followed by a press conference, various alternatives were discussed, from a rate cut to activating alternative bond-purchase schemes, suggesting that some policymakers had deep reservations.
“There was unanimous agreement that bold and decisive action was needed to counter the serious risks posed by the rapidly spreading coronavirus for the monetary policy transmission mechanism,” the ECB said in the minutes of the meeting published on Thursday.
“Reservations were expressed by some members about the necessity of launching a new, dedicated asset purchase programme,” said the ECB, adding that policymakers also had concerns about the proposed communication on the issuer limit.
The central bank could previously buy up to a third of each country’s bonds but it sidestepped this rule with a decision not to apply it to the emergency purchases.
Sources earlier told Reuters that Dutch central bank chief Klaas Knot and Bundesbank President Jens Weidmann were among the critics of the new purchase scheme.
“However, notwithstanding the hesitation, readiness was also expressed to go along with the carefully phrased communication, in the light of the scale of the market disruptions and challenges faced in the pursuit of the ECB’s mandate,” it added.
STRING OF STIMULUS STEPS
The minutes also revealed that some policymakers advocated the use of the ECB’s never-deployed Outright Monetary Transactions (OMT) scheme, which allows the ECB to buy unlimited quantities of any country’s debt – or simply more buys through the existing asset-purchase programme.
One policymaker suggested a reduction in the ECB’s credit rating requirement for bonds to buy, in order to expand the eligible pool of assets, while others wanted the ECB to express a willingness to expand purchases into new asset classes.
Some also suggested an interest rate cut at the meeting of the council, the ECB’s decision-making body which includes the governors of the central banks of the 19 euro zone nations.
The ECB, like other major central banks, has scaled up its response to the pandemic, unveiling a string of stimulus measures, including paving the way for potentially unlimited money-printing.
In another unscheduled meeting earlier this week, the ECB agreed to further measures, easing collateral requirements so banks could borrow more on the cheap, even if the central bank then takes on greater financial risk.
Although the ECB has yet to release fresh growth projections, Lagarde has said that the euro zone economy could contract by up to 10% this year, its biggest drop on record, if the lockdown lasts several months.
Data released since the emergency meeting indicate that ECB has been buying record volumes of debt, skewing its purchases towards Italy, the nation hit hardest by the crisis.
To read the accounts of the ECB’s regular and emergency meetings in March, click on: https://www.ecb.europa.eu/press/accounts/html/index.en.html
(Editing by Carmel Crimmins and Pravin Char)