Thursday 12 November 2020 6:13 pm

ECB turns to emergency bonds and ultra-cheap loans to control financial costs

The ECB will use its emergency bond-buying and ultra-cheap loans to banks as the primary instruments to control financing costs, European Central Bank president Christine Lagarde told the ECB’s annual forum on central banking this evening.

Read more: ECB to focus on bond buying and bank liquidity to keep eurozone afloat, says Lagarde

The EU heavyweight said financing costs for governments, households and businesses in the eurozone will stay “exceptionally favourable” until the economy recovers from the pandemic.

Lagarde welcomed the “encouraging” news of a potential Covid-19 vaccine breakthrough that fuelled a market rally this week, but said the second wave of the pandemic still presented “new challenges and risks” for the eurozone economy.

“The key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum,” she continued. “The ECB was there for the first wave and the ECB will be there for the second wave.”

Meanwhile Jerome Powell, who is Chair of the Federal Reserve pointed out that while banks have done well so far throughout the crisis, more needs to be done. He said this is not the time for “complacency.”

Losing sleep

Elsewhere Lagarde said she had a “hunch” that there will eventually be a central bank digital currency. 

She has previously told reporters: “Europeans are increasingly turning to digital in the ways they spend, save and invest. We should be prepared to issue a digital euro”.

One of the ECB’s main objections to a digital version of the euro is the risk it may displace traditional deposits, thereby hollowing out commercial banks and crowding out private solutions.

The ECB said in its report that deposits in digital euros would probably be capped and subject, at least in part, to the ECB’s interest rate on deposits, which currently stands at -0.5%.

The banking authority has given itself until mid-2021 to make a final decision whether to move ahead with the project, which is now open for public consultation.

Read more: ECB leaves interest rates on hold as it monitors recovery

Finally, when asked what frightened her in the current climate, the EU heavyweight said the outbreak of coronavirus among minks in Denmark was especially worrisome. 

She said the transmission from human to animal could be “devastating”. Adding it could put into jeopardy vaccine hopes.

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