ECB plans more cheap bond purchases and loans in December as pandemic strikes

FRANKFURT (Reuters) – The European Central Bank pledged on Thursday to take further action in December to contain the growing fallout from a second wave of coronavirus infections, likely in the form of more bond purchases or cheap credit for banks.

While the bank’s board of governors left the policy unchanged this time around, it was the clearest sign of new stimulus to come as new nationwide lockdown measures would make a further double-dip recession. more likely for the euro area economy.

“We all agreed that it was necessary to act and therefore to recalibrate our instruments at our next Governing Council meeting,” ECB President Christine Lagarde said at a conference. hurry.

Sources told Reuters that some policymakers at Thursday’s meeting were in favor of expanding the ECB’s Pandemic Emergency Purchase Program (PEPP), while others put more emphasis on expanding the ECB’s Pandemic Emergency Purchase Program (PEPP). focus on even more generous credit for banks through its targeted long-term refinancing operations (TLTROs), or a mixture of the two.

One of the open questions was about the size and makeup of the PEPP, which has used up nearly half of its 1.35 trillion euros ($ 1.60 trillion) firepower, and how to target it on the current situation, said one of the sources.

Lagarde said ECB staff were already working on “all instruments”.

“We are sticking to our forecast of a 500 billion euro expansion of the PEPP program that we have been looking at since June, but we believe more will come in parallel,” said Frederik Ducrozet, strategist at Pictet. Wealth Management.

The euro fell sharply against the US dollar after Lagarde’s speech and was last down 0.7% to $ 1.166. Yields on government bonds have fallen.

Lagarde has repeatedly said the risks to the region’s recovery are “clearly on the downside” and heavily dependent on the success of efforts to contain a new wave of infections threatening to overwhelm Europe this winter.

FILE PHOTO: A sculpture of the euro logo stands in Frankfurt on October 26, 2014. REUTERS / Ralph Orlowski / File Photo

The bloc’s biggest economies, Germany and France, announced new lockdowns overnight. Others, among the 19 countries that use the euro, are also in the process of shutting down much of their service sectors, a blow to the nascent recovery.

By buying around 100 billion euros ($ 118 billion) of debt per month, the ECB has already pushed borrowing costs to historically low levels, and the spreads between the borrowing costs of eurozone members have returned to pre-pandemic levels.

But there are clear limits to his powers and Ms Lagarde stressed that the European Union’s € 750 billion stimulus fund should not be delayed, saying monetary policy should be complemented by massive support from the EU. government.

“An ambitious coordinated fiscal stance remains essential,” Lagarde said, adding that she would not be surprised if individual governments offered more budget support given the deteriorating conditions.

GLOVE OF DEPTH

The ECB’s problem is that the new COVID-19 restrictions call into question its view that the eurozone economy will grow back to its pre-crisis level by the end of 2022.

Inflation expectations, the main concern of the ECB, are also falling. While the threat of deflation is not yet on the agenda, inflation may fall short of the ECB’s target of nearly 2% for many years to come.

“The December staff projections will likely show that a return to the ECB’s inflation target could be further delayed,” said Elga Bartsch, head of macroeconomic research at the BlackRock Investment Institute.

The new COVID measures in France mean that people mainly have to stay at home, only going to work if their employer finds it impossible for them to do the work remotely. The schools will remain open.

Germany, whose economy was already losing strength, will close bars, restaurants and theaters in November, but schools will remain open and shops will be allowed to operate with strict access limits.

Spain, one of Europe’s worst COVID-19 hotspots, where the government plans to announce a six-month state of emergency, may already be back in recession, while Italy also unveiled new restrictions.

Lagarde said how the virus is handled by the end of the year would determine which side of zero the fourth quarter growth figure falls on.

“The ECB was there for the first wave, the ECB will be there for the second wave,” she said.

(1 USD = 0.8461 euros)

Written by Mark John; Editing by Catherine Evans and Jon Boyle


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