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The E.C.B. is encouraging banks to lend to small and medium-size businesses, but it decided not to cut a key interest rate.
FRANKFURT — The European Central Bank joined other central banks Thursday in taking forceful action to prevent the spread of the coronavirus from undermining the global economy. But the bank disappointed expectations it would cut interest rates as the eurozone hurtles toward recession.
The central bank will, among other things, effectively pay commercial banks to issue loans to small and medium-size businesses, which have been hit particularly hard by travel bans and regional lockdowns. And it will substantially increase a bond-buying program intended to push down market interest rates.
The outbreak “has been a major shock to the growth prospects of the global and euro area economies,” Christine Lagarde, the president of the European Central Bank, said at a news conference.
Warning that the central bank cannot save the eurozone by itself, she leaned hard on European political leaders to do more to help businesses suffering from supply chain disruptions, travel bans and regional lockdowns.
“I’ll tell you what I am particularly worried about,” she told reporters. “It would be the complacency and slow-motion process that would be demonstrated by the fiscal authorities of the euro area in particular.”
The central bank’s Governing Council, at a meeting that some members attended online, took a risk by not cutting interest rates as the Federal Reserve, Bank of England and other central banks have done recently. The European Central Bank’s failure to deliver the widely expected cut could reinforce the impression that it has run out of room to use its most powerful policy tool and has few options left to combat a crisis.
Some economists saw the bank’s action as tepid.
“These measures will do nothing to boost the economy or to support lending to counter the dislocations caused by the coronavirus and oil shocks.,” Carl Weinberg, chief economist at High Frequency Economics in White Plains, N.Y., said in an email.
Stock markets in Europe and the United States plunged after the European Central Bank decision, though other factors, such as President Trump’s ban on most European travelers entering the United States, certainly played a role. The FTSE 100, in London, had its worst day since the stock market crash in 1987.
Ms. Lagarde, in office fewer than five months, was under intense pressure to take actionto contain the economic side effects of the virus outbreak.
Economists have largely stopped arguing about whether there will be a recession in the eurozone and are instead debating how long it will last. “Dramatic declines in global growth have to be expected,” the Kiel Institute for the World Economy, an influential German research organization, predicted on Thursday.
But the European Central Bank had less room to maneuver than its peers. It had already cut interest rates almost as low as they could go in an unsuccessful attempt to push up inflation to the level considered optimal for growth.
Some analysts argued that the latest actions were a de facto interest rate cut, even though official benchmark rates stayed the same.
One measure announced Thursday would allow commercial banks to borrow as much money as they want for three months at a negative interest rate, meaning they don’t have to pay all of the money back.
In addition, if banks promise to lend central bank funds to their customers and meet certain other conditions, they will be able to borrow money for three years at a negative interest rate of 0.75 percent.
“Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need,” the central bank said in a statement.
The central bank’s Governing Council did not, as expected, cut the negative rate it charges commercial banks to deposit money at the central bank. The interest rate of minus 0.5 percent is intended to put pressure on lenders to put the money to work rather than leave it at the central bank. Analysts had expected the central bank to cut the rate to minus 0.6 percent.
Some economists argued that such an incremental change would have had negative side effects without accomplishing much. A cut “would in any case have had only a minimal effect given the E.C.B.’s already negative deposit rates,” Clemens Fuest, president of the Ifo Institute in Munich, said in a statement.
The European Central Bank’s main benchmark, the rate it charges commercial banks for short-term loans, was already zero, the level considered to be the absolute minimum.
Other measures announced Thursday include:
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Buying an additional 120 billion euros, or $135 billion, of government and corporate bonds as part of an effort to increase demand, drive down market interest rates and reduce the cost of borrowing. Currently the central bank is buying bonds at a rate of 20 billion euros a month. The bank intends to spend the additional money by the end of the year, adjusting the timing as needed to react to events.
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Temporarily reducing restrictions on bank capital that will give commercial banks more leeway to issue loans. Banks were cautioned not to use the extra money to pay managers more or issue higher dividends to shareholders.
“We regard the current shock as severe, but still temporary if the right set of policy measures are decided by all players,” Ms. Lagarde said. “The economy will then bounce back.”