Christine Lagarde spooked markets seven weeks ago by saying that the European Central Bank wasn’t there to close the spread in yields between government bonds of eurozone countries. On Thursday, the ECB president did everything she could to convince markets of the opposite.
In a tense news conference, Lagarde chose to read from a script to avoid any communication mishaps. The message was simple: Whatever happens during the COVID-19 epidemic, the central bank will adjust its financial instruments to make sure that governments can keep funding themselves at reasonable rates and banks can keep pumping credit into the real economy. The debt market took heart and most government bonds rallied on the day.
This time, the ECB chose to act only in relation to the banking system. It improved the terms on its existing rounds of cheap loans to banks (known as targeted longer-term refinancing operations, or TLTROs), cutting the funding rate by 50 basis points to as low as minus 1 percent. And it launched a new accompanying scheme to be used to address the pandemic (PELTROs), which will lend money at as little as minus 0.25 percent. The money provided by these schemes isn’t meant to stay at the banks, Lagarde said; it’s for "financing the real economy.” It remains to be seen how well this mechanism will work.
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