The ECB never went any lower than the present 1% overnight refi rate even at the depths of the global financial crisis in late 2008 and early 2009. We have to assume they would prefer not to go any lower than that now, despite the European focus of today’s crisis. So short of cutting rates further, what are their options?

  1. They have already resumed lending to the market for three and six month terms with no spread over the overnight rate and unlimited funding. They could expand that program for a specific period, say the next year.
  2. The ECB faces the maturity of EUR 442 bln worth of one-year loans made to banks at the end June. They could make those loans available for another year.
  3. They could, of course lower policy rates further, but that seems less likely than extending term loans as discussed above. The ECB has not prepared the market for lower rates, so a cut would be a surprise. If it were to take place, it would probably boost European stocks (and risk trades globally) but undermine the euro at least temporarily as currency traders would view an outright rate cut as a panic move, especially as the ECB has not telegraphed its intentions.

The impact of this scenarios would be sequentially greater. Option one would have little impact, option 2, more and option three the most, in my opinion.