ECB, Bank of England ramp up stimulus
Strong action and strong words from the European Central Bank (ECB) and the Bank of England (BoE) reverberated across Europe and the world as both announced major monetary policy responses to the coronavirus outbreak. We believe both should have positive effects.
Overnight, the ECB announced a new temporary asset purchase program, the Pandemic Emergency Purchase Program (PEPP). It will purchase €750 billion of securities in private and public sectors of all countries, saying it will “do everything within its mandate.” But the periphery countries are the focus. Government bond yields in Italy, Greece, Portugal and Spain have soared since the virus hit Europe and the ECB announcement made clear it will support those countries, not tolerating “any risk to the smooth transmission of its monetary policy in all jurisdictions of the euro area.” While some European governments are responding with fiscal plans, the ECB had to step up to the plate to compensate for the lack of a joint fiscal response.
This morning, the BoE announced it cut interest rates to 0.1% and increased its bond-buying program. Previously, it introduced a new term funding program, Term Funding Scheme. It is meant to support lending to small and medium-sized enterprises, known as SMEs, to enable the banks to provide credit to these companies.
These recent moves come after earlier efforts have been deemed inadequate or not affecting all aspects of the economy. While the asset purchase programs are labeled as temporary, they likely will remain until central bankers think the financial aspects of the health crisis has passed.
The positive impact of the ECB action has already begun. Eurozone periphery country bonds have reacted well, with yields dropping and spreads tightening. The action by the BoE has also been hailed as a robust move.