ECB's Lagarde on Post-Pandemic Outlook
The European Central Bank escalated its efforts to shield the euro zone from a possible double-dip recession with another burst of monetary stimulus to lock in low interest rates at least until the pandemic crisis is over.
Policy makers increased and extended emergency bond purchases, and approved more long-term loans on cheap terms for another year. The euro jumped.
- The Pandemic Emergency Purchase Program was increased by 500 billion euros (US$606 billion) to 1.85 trillion euros, and extended it 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
- Favourable 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 per cent
- 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 per cent
- ECB President Christine Lagarde will hold a press conference call at 2:30 p.m. in Frankfurt, when she will also unveil new economic projections with a first outlook for 2023.
“All these steps are real central-bank engineering -- something Lagarde called ‘recalibration’ at the October meeting -- but no actual stepping up of monetary stimulus,” said Carsten Brzeski, chief economist at ING Germany. “Instead, the ECB’s main aim is to extend the current level of monetary accommodation.”
The decision came as European Union leaders moved closer to 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 restaurants forced to close to to contain infections.
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.
The euro’s recent surge against the dollar is another headwind for the ECB, putting downward pressure on inflation by making imports cheaper. The single currency rose 0.4 per cent to an intra-day high of US$1.2126 following the decision, while German bonds erased gains.
“For me, the last euro downside risk of the year has passed,” said Jordan Rochester, a foreign exchange strategist at Nomura.
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 two per cent 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 from Jana Randow, Carolynn Look, Alexander Weber, Craig Stirling, Zoe Schneeweiss, Wout Vergauwen, Alexei Anishchuk, Alexander 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.