The European Central Bank approved fresh stimulus measures and temporarily dropped banks' capital requirements on Thursday to help the euro zone cope with the shock of the coronavirus pandemic but kept interest rates on hold, disappointing markets.
With millions of people in lockdown, financial markets in freefall and companies struggling with disrupted supply chains, the ECB said it would give businesses more ultra-cheap loans, raise asset purchases and provide banks with capital relief.
"The spread of the coronavirus has been a major shock to the growth prospects of the global economy and the euro area economy, and it has heightened market volatility," ECB President Christine Lagarde told a news conference.
The ECB said it would roll out cheap loans for banks, at an interest rate as low as minus 0.75%, and step up bond purchases by a total of 120 billion euros through the end of the year.
But the deposit rate will stay unchanged at a record low minus 0.5%, suggesting policymakers believe it may already be near the so-called reversal rate, where further cuts are counterproductive because they hurt bank margins to the point of thwarting lending.
The euro fell, Italy's 10-year bond yields jumped to a seven-month high and stocks tumbled as markets expressed their disappointment at the package.
The ECB's moves follow emergency rate cuts by the US
Federal Reserve and the Bank of England, highlighting fears among policymakers that coronavirus could trigger a global recession and threaten the sort of disruption last seen in the 2008 financial crisis.
In an unprecedented synchronised move, the ECB's bank supervisory arm said it will let euro zone banks fall short of some key capital and cash requirements, to keep credit flowing to the economy.
The European Union's banking watchdog meanwhile said it has postponed this year's stress test of lenders until next year.
"The coronavirus is proving to be a significant shock to our economies," said Andrea Enria, the ECB's chief supervisor.
"Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties." The central bank kept the door open to further rate cuts, keeping its interest rate guidance unchanged.
"She (Lagarde) delivered what was the consensus. Markets that traded down pretty hard since then did so because clearly they wanted a lot more," said Barnaby Martin, head of European credit strategy at Bank of America. "But we always knew that the ECB was further up against the political constraints of what they could do than other central banks." On Wednesday, the World Health Organization called the coronavirus a pandemic for the first time, saying other countries would soon join Italy and Iran on its frontline.
US President Donald Trump meanwhile imposed restrictions for one month on travel to the United States from 26 European countries.
While policymakers insist the financial sector is sound and there will not be a repeat of the 2008 crisis, European stocks have dropped 28% in the past few weeks with banks taking an even bigger hit of 35%.
German bond yields have meanwhile tumbled to minus 0.80% as investors seek safety.
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Lagarde, who has encouraged ECB staff to work from home if they wish to, has repeatedly told governments to act quickly on the virus because passivity could lead to calamity on a par with the global financial crisis.
"In light of rapid developments, working on responses on all fronts to tackle #coronavirus impact," European Commission chief Ursula von der Leyen said in a tweet on Thursday.
"Assessment with scientists, coordination of health and border measures, provision of protective equipment, package to prop up the EU economy."
Many economists expect Germany, Europe's economic powerhouse, to be in recession in the first half of 2020 and some predict a similar outturn for the entire bloc.
While the ECB's stimulus suggests it is keen to help, it has already used up its most powerful weapons in nearly a decade of stimulus. Interest rates are at record lows, it has gobbled up 2.6 trillion euros ($2.94 trillion) of mostly government debt, and has for years offered essentially free cash to banks to keep them lending.
Low rates may also be sowing the seeds of the next crisis as they compress bank margins and fuelling housing bubbles.
Compounding the ECB's headache, oil prices have crashed, a double-edged sword for rate-setters.
While lower crude prices boost growth and consumer purchasing power through lower fuel prices, they also drag inflation sharply lower -- a problem as the ECB has undershot its target of almost 2 percent since 2013.
Some economists expect inflation to fall to zero this spring if crude prices stay at current levels, raising fears of a damaging deflation spiral.
The ECB cut its quarterly growth forecasts for this year and next on Thursday but said the new estimates, which were collated before the coronavirus outbreak in Europe, were probably already out of date.