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Opinion

Monetary policy: The ECB has admitted its limits

As the coronavirus Covid-19 crisis mounts, banks are finally being heard on negative rates, but that might not be a good thing.

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It couldn’t have come on a worse day: Christine Lagarde had US president Donald Trump to thank for that.

Her first big test as president of the European Central Bank (ECB) was already an all-but impossible one to pass, and even more so after a new US ban on flights from continental Europe earlier on Thursday had put a big damper on the eurozone’s most important monetary policy meeting in years.

Yet if equity markets are anything to go by, the ECB singularly failed to reinstall confidence, even underperforming the lacklustre market response to the 50-basis-point cut by the Federal Reserve earlier in March.

The continent’s stock exchanges deepened the morning losses that followed the flight ban, marking record falls in the wake of the ECB’s decision to keep rates on hold. Investors had been pricing in a 10bp cut. More worryingly still was the sell-off in Italian government debt, as spreads to German government bonds shot up.

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