March 12, 2020 / 1:07 PM / 21 days ago

ECB approves fresh stimulus for reeling economy but keeps rates steady

FRANKFURT (Reuters) - The European Central Bank approved fresh stimulus measures on Thursday to help the euro zone economy cope with the growing cost of the coronavirus epidemic, but kept interest rates unchanged in a move that may disappoint financial markets.

The ECB said it would offer fresh loans to banks, offer previously agreed liquidity facilities at even more favourable rates and it would temporarily increase assets purchases to help the economy cope.

“A temporary envelope of additional net asset purchases of 120 billion euros (105.8 billion pounds) will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes,” the ECB said.

With millions of people in lockdown, markets in turmoil and companies struggling with disrupted supply chains, the economy is already reeling so ECB support was fully priced in and investors were only guessing about the extent of any move.

Markets had fully priced in a 10 basis point cut in the deposit rate to minus 0.6% even though several policymakers have expressed deep scepticism in recent months about the value of any further reductions.

The U.S. Federal Reserve and the Bank of England have both cut rates in emergency meetings in recent days. But ECB rates are already deep in negative territory and seen as close to the reversal rate where further cuts are counterproductive because they hurt bank margins to the point of thwarting lending.

The ECB’s fresh measures are mainly targeted at businesses, including small and medium-sized enterprises who are at the biggest risk from the crisis.

Warning EU leaders that urgent action was needed, ECB President Christine Lagarde earlier this week told EU leaders that inaction on their part could fuel the sort calamity last seen in the global financial crisis of 2008.

With Thursday’s decision, the ECB’s deposit rate remains at minus 0.5% and the main refinancing rate stands at 0%.

Reporting by Balazs Koranyi; Editing by Catherine Evans

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