Skip to main content
logo
  • Products
    Overview

    Funds

    • Performance & Yields
    • Liquidity
    • Ultra-Short
    • Short Duration
    • European domiciled products

    Solutions

    • Cash Segmentation
    • Separately Managed Accounts
    • Managed Reserves Strategy

    Fund Information

    • Regulatory Updates
  • Insights
    Overview

    Liquidity Insights

    • Liquidity Insights Overview
    • Case Studies
    • ESG Resources for Liquidity Investors
    • Leveraging the Power of Cash Segmentation
    • Cash Investment Policy Statement

    Market Insights

    • Market Insights Overview
    • Eye on the Market
    • Guide to the Markets
    • Market Updates

    Portfolio Insights

    • Portfolio Insights Overview
    • Currency
    • Fixed Income
    • Long-Term Capital Market Assumptions
    • Sustainable investing
    • Strategic Investment Advisory Group
  • Resources
    Overview
    • MORGAN MONEY
    • Global Liquidity Investment Academy
    • Account Management & Trading
    • Announcements
  • About us
    Overview
    • Diversity, Equity & Inclusion
    • Spectrum: Our Investment Platform
    • Our Leadership Team
  • Contact us
  • English
  • Role
  • Country
MORGAN MONEY LOGIN
Search
Menu
Search
You are about to leave the site Close
J.P. Morgan Asset Management’s website and/or mobile terms, privacy and security policies don't apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan Asset Management isn’t responsible for (and doesn't provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan Asset Management name.
CONTINUE Go Back
  1. The European Central Bank aims to ‘thread the needle’

  • LinkedIn Twitter Facebook Line

The European Central Bank aims to ‘thread the needle’

30-04-2020

Jai Malhi

The leader of the European Central Bank (ECB) has become very familiar with the challenge of ‘threading the needle’ in recent years and the test facing Christine Lagarde today was no different. After last month’s major announcements regarding the expansion of its QE program, the ECB announced few new meaningful measures today. It left its key interest rates unchanged and made no enhancements to its asset purchases. It did however decide to make borrowing conditions more favourable for euro area banks under its Targeted Longer Term Operations III (TLTROs) facility.

With an increasingly restricted toolkit to provide further stimulus, the ECB’s messaging had to be reassuring enough to avoid triggering market volatility and at the same time diplomatic enough to appease divergent views from across the euro area on the appropriate policy path. This task was only made harder by the downgrade of Italy’s sovereign bond rating by Fitch to one level above junk status and the large contraction in eurozone GDP for the first quarter of this year (-3.8% quarter on quarter).

Few new policy changes

With its deposit rate already at -50 basis points, the ECB’s decision to not reduce interest rates so far this year suggests a strong reluctance to go even lower. However, the ECB is not alone in seeing limited value in pushing rates further into negative territory. The Federal Reserve in its own meeting yesterday dismissed the idea that it would consider negative interest rates. The ECB is instead focusing on other tools as its main policy levers.

Borrowing costs for the TLTRO III programme were lowered to -1%, a further 25 basis points lower from last month’s meeting. The recent ECB bank lending survey showed a material increase in demand for loans across the euro area as corporates search for funds to get them though this period. In the near term, another series of short-term refinancing operations were also made available, likely as a safety net over the coming months. These are helpful measures but the magnitude of bond purchases is likely to be more important in supporting government spending to help mitigate the impact on the economy.

What are the other options?

With markets focused on debt sustainability, particularly in countries such as Italy, the ECB will need to focus on expanding its asset purchase programmes. It could do so by ramping up purchase amounts under the Pandemic Emergency Purchase Programme (PEPP). In the press conference Lagarde suggested that PEPP is the preferred tool as opposed to Outright Monetary Transactions (OMT), previously used in the sovereign debt crisis, given this is a euro area wide issue. An extension of PEPP beyond the end of this year, dependent on the duration of the virus was also highlighted as an option.

Having already announced that it would accept recently downgraded high yield bonds – so called ‘fallen angels’ – as collateral for banks’ loans and made Greek bonds eligible for the PEPP, the ECB could also widen the scope of the asset purchases to include high yield bonds. Lagarde stopped short of explicitly confirming the forthcoming implementation of these measures, but stated that the flexibility of the ECB’s mandate can be increased if required.

Ultimately, it is clear that the ECB will need to increase stimulus measures this year to ensure that the wave of bond supply required to fund government stimulus packages is smoothly digested by the market. At this meeting, Lagarde preferred to take a “wait and see approach” in the hope that coordinated government action will shoulder some of the burden and lift some of the pressure on the central bank to save the day.

Investment implications

Trying to find the perfect balance of policy announcement and forward guidance was always a tough challenge and markets appear to have reacted negatively to the measures announced today. The euro has fallen around 0.3% versus the dollar and European equities are also down on the day. The spread of Italian 10-year yields over Germany has been volatile and has broadly risen. With expectations from the ECB that eurozone GDP could fall by 5% - 12% in 2020, calls for further central bank action look set to get louder over the coming months.

0903c02a828a8a20

  • European Central Bank
J.P. Morgan Asset Management

  • Investment stewardship
  • About us
  • Contact us
  • Privacy policy
  • Cookie policy
  • Sitemap
J.P. Morgan

  • J.P. Morgan
  • JPMorgan Chase
  • Chase

READ IMPORTANT LEGAL INFORMATION. CLICK HERE >

The value of investments may go down as well as up and investors may not get back the full amount invested.

Copyright 2025 JPMorgan Chase & Co. All rights reserved.