The European Central Bank (ECB) once again boosted its multitude of stimulus measures that are aimed at softening the hit to economic activity from the recent resurgence of the COVID-19 pandemic, including increasing the size of its Pandemic Emergency Purchase Program (PEPP) for the second time this year and extending its life by another 9 months.
But the ECB, the central bank for the 19 European countries that use the single currency, left its benchmark refinancing rate at 0.0 percent and the marginal lending rate at 0.25 percent – unchanged since March 2016 – and the deposit rate a minus 0.50 percent, unchanged since September 2019.
“The resurgence in COVID -19 cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020,” ECB President Christine Lagarde said, adding:
“Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced.”
She added the latest data and staff forecast suggest a more pronounced impact of the pandemic in the near term and a more protracted weakness in inflation that earlier expected.
The bank’s governing council confirmed its guidance for interest rates to remain at their present or lower levels until it sees the outlook for inflation “robustly” converge to a level that is sufficiently close to, but below 2 percent.
The ECB’s moves were widely anticipated by financial markets and follows the ECB’s statement at its last policy meeting in October that economic risks were now clearly tilted to the downside and based on its updated December economic forecasts it would “recalibrate” its monetary instruments to ensure that financing conditions remain favorable to support the economic recovery.
While stock markets largely shrugged off the ECB’s latest move, foreign exchange markets responded by boosting the euro further to trade at 1.215 against the U.S. dollar – reflecting the larger size of the Federal Reserve’s stimulus this year – to be up 7.6 percent this year.
The rise in the euro will harm the global competitiveness of European exports and the ECB said it would “continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook.”
In an update to its forecast, the ECB expects the euro area economy to shrink 7.3 percent this year, slightly better than the September forecast of a 8.0 percent decline, and then rebound and grow 3.9 percent next year, down from an earlier forecast of 5.0 percent.
The gross domestic product of the euro area grew 12.5 percent in the third quarter from the second quarter, when GDP shrank 11.7 percent after falling 3.7 percent in the first quarter.
While today’s new bout of stimulus is aimed at supporting the flow of credit and underpin economic activity, the ECB said uncertainty remains high as far as the dynamic and timing of vaccine roll-outs.
“The Governing Council therefore continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry,” the ECB said.
The ECB raised the size of its PEPP program by another 500 billion euros to a total of 1.850 billion and extended the time for purchases to at least the end of March 2022, adding it would continue to purchase assets until “it judges that the coronavirus crises phase is over.”
PEPP was originally created in March to purchase a wide range of private and public sector securities assets to ensure the transmission of the ECB’s easy policy to financial markets, with a size of 750 billion and purchases to run until the end of this year.
In June PEPP was raised by 600 billion to 1.35 billion euros and its life extended to end June 2021.
In addition to extending it today, the ECB will also continue to reinvest principal payments from maturing securities bought under PEPP until at least the end of 2023.
Thirdly, the ECB also adjusted the conditions of its 3rd targeted longer-term refinancing operations (TLTRO-III), which was also launched in March, extending its favorable terms by 12 months to June 2022, and will conduct three additional operations between June and December 2021.
It also raised the total amount that banks can borrow through TLTRO to 55 percent of their eligible loans from 50 percent, extended to June 22 the duration of collateral easing measures to ensure banks can make jul use of its easy liquidity.
Fifthly, the ECB will offer four additional pandemic emergency longer-term financing operations (PELTROs) – a program launched in April – to backstop liquidity, and finally also continue its current purchases under its asset purchase programme (APP) from 2015 at a monthly pace of 20 billion euros.
The ECB also confirmed that it expects to continue with these monthly purchases “for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.”
In a 7th and final step, the ECB also extended its repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks until March 2022.
Deflation has returned in the last four months, with consumer prices falling 0.3 percent in September, October and November, and the ECB expects inflation to remain negative until early 2021.
On average inflation will only be 0.2 percent this year, down from September’s forecast of 0.3 percent, and then only rise to 1.0 percent in 2021, 1.1 percent in 2022 and 1.4 percent in 2023.