The European Central Bank escalated its campaign to shield the euro zone from a possible double-dip recession with another burst of monetary stimulus, while cautioning that it may not deploy all the new firepower.
The additional envelope of 500 billion euros ($607 billion) in bond-buying approved at the meeting on Thursday “need not be used in full,” ECB President Christine Lagarde said in a news conference, “if favorable financing conditions can be maintained.”
The relatively restrained comments on how much stimulus will ultimately be deployed helped push the euro to an intraday high.
Policy makers increased and extended emergency bond purchases for nine months,a compromise after officials argued over whether the extra duration should be 12 months or half of that, according to people familiar with the discussions. They also approved more long-term loans on cheap terms for another year. The stimulus aims to lock in low interest rates at least until the pandemic crisis is over.
While the economic rebound in the third quarter was stronger than expected, the coronavirus continues to pose serious risks to public health and to the euro area, Lagarde said, observing that the economy is likely to contract in the final three months of the year.
“Looking ahead, the news of prospective roll-outs of vaccines allows for greater confidence in the assumption of a gradual resolution of the health crisis,” she told reporters. “However, it will take time until widespread immunity is achieved.”
- The Pandemic Emergency Purchase Program was increased to 1.85 trillion euros, and extended by nine months to at least the end of March 2022. Reinvestments will be made until at least the end of 2023
- An older bond-buying program will continue to run at a monthly pace of 20 billion euros until shortly before interest rates rise
- Favorable terms on the ECB’s TLTRO-III bank lending program will be extended by 12 months to June 2022, and the ECB will make three new offers under the program next year. Total amount banks can borrow raised to 55% of banks’ stock of eligible loans, from 50%
- Four additional pandemic emergency longer-term refinancing operations (PELTROs) will be offered in 2021 “to provide an effective liquidity backstop.”
- The easing of collateral rules announced earlier this year will be extended to June 2022. It will reassess the measures before the end date
- Interest rates remained unchanged, with the deposit rate at -0.5%
As the decision was announced, European Union leaders were on the verge of resolving a dispute over a 1.8 trillion-euro joint fiscal package that would put the region on a firmer footing for 2021.
The ECB aims to keep financial conditions loose in the face of mounting debt burdens as governments pump fiscal aid to companies and households. The economy is almost certainly shrinking again, with many shops and restaurants forced to close to to contain infections.
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“The PEPP extension to March 2022 is designed to allow a vaccine to reach most people, enabling activity to return to ‘normal’. As such, this extension may well be the last.”
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Lagarde said the ECB has “good reason” to believe that by the end of the next year, the region will have reached sufficient herd immunity to allow economy to function more normally.
She also expressed her dismay with “disappointingly low” inflation, which could partly be explained by the strength of the euro. The currency’s recent rise to the strongest level since 2018 is being watched carefully by the Governing Council, the president said. The euro rose 0.7% to an intra-day high of $1.2159 following the decision.
“For me, the last euro downside risk of the year has passed,” said Jordan Rochester, a foreign exchange strategist at Nomura.
The latest round of forecasts unveiled by the ECB on Thursday showed inflation averaging 1.4% in 2023 after being barely above zero this year. Growth is projected to rebound to 3.9% in 2021 after 7.3% contraction in 2020.
Also in the background is the risk of a no-deal Brexit. British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen, who held talks over dinner on Wednesday, agreed to give both sides until Sunday to try to bridge their differences.
Central bankers have been signaling a new round of stimulus for weeks, stressing the need to keep support measures running at least until an economic recovery is entrenched. Covid-19 vaccines are only just being rolled out, and the economic scars from the pandemic will last well past the end of the health emergency.
Chief economist Philip Lane has also stressed the need to get inflation, which is currently below zero, back on its pre-pandemic path toward the goal of just-under 2% as soon as possible.
The Governing Council repeated its pledge to keep stimulus in place until it “judges that the coronavirus crisis phase is over.”
— With assistance by Jana Randow, Carolynn Look, Alexander Weber, Craig Stirling, Zoe Schneeweiss, Wout Vergauwen, Alexei Anishchuk, Alexander Michael Pearson, Fergal O’Brien, Catherine Bosley, Jeff Black, Brian Swint, Alaa Shahine, Lucy Meakin, David Goodman, Eileen Gbagbo, Jeannette Neumann, Alessandra Migliaccio, William Horobin, and Greg Ritchie
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