The ECB boosted its COVID-19 stimulus package by $606 billion and extended its bond-buying program by nine months
European Central Bankexpanded its bond-buying program by 500 billion euros to 1.8 trillion euros to limit the economic fallout from the second wave of coronavirus.
- The end-date for the
ECB's program was extended to March 2022, from June next year, and the central bank plans to keep this backstop in place until the worst of the coronavirus crisis is over.
- The most meaningful aspect of Thursday's ECB decision was the extension of the scheme, rather than the size, a global market strategist said.
- European leaders are also about to finalize a 750-billion euro recovery fund this week.
The European Central Bank boosted the size of its
The ECB's asset-buying program is now a whopping 1.8 trillion euros ($2.2 trillion), taking total monetary
"In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over," a statement accompanying the policy decision said. The ECB left interest rates at zero, as expected, and the changes to its stimulus program were in line with analysts' forecasts.
"I think it's fair to say that we had all anticipated that there would be a possible second wave, it was actually embedded in previous projections. But the depth of it, the duration of it, and the containment measures associated with it were not anticipated to the extent that they actually occurred and are still taking place," Lagarde said at a press conference after the policy decision.
Europe, which was at the epicenter of the initial outbreak of the disease outside of China, where it was first detected, has witnessed a resurgence of the virus in major economies such as Germany, France, Spain, Italy and Ireland that has forced total, or partial lockdowns.
The ECB anticipates a slightly less severe hit to economic growth in the eurozone in 2020 than it forecast in September, but it also now expects growth to pick up more slowly in 2021 and 2022 than it had done previously.
The central bank forecasts a contraction of 7.3% in gross domestic product in 2020, up from a decline of 8% forecast in September, while for 2021, it sees GDP growing by 3.9%, compared with its last forecast of 5%.
Inflation is expected to pick up more slowly than the ECB previously thought, rising by 0.2% this year, compared with a prior forecast for 0.3%. The ECB has said it will tolerate a rise in inflation beyond its existing 2% target, as growth picks up. But the inflation rate is unlikely to come close even by 2023, when it reaches a forecast 1.4%.
Adding to the ECB's problem with inflation is the strength of the euro, which has appreciated by around 8% so far this year against the dollar and the pound and by nearly 2% against the Chinese yuan, making eurozone exports less competitive and dampening any rise in prices.
Lagarde reiterated the ECB's stance that it does not intervene in the currency
"We do not target an exchange rate, but clearly the exchange rate, and in particular the appreciation of the euro plays an important role and exercises downward pressure on prices, so we monitor it," Lagarde said. "We will continue to monitor it very carefully going forward."
The euro rallied sharply against most major currencies, gaining 0.6% against the dollar and then yen and 1.3% against sterling in afternoon trading.
The most meaningful aspect of the ECB's decision on stimulus was the extension, said Jai Malhi, global market strategist at JPMorgan Asset Management. "If the EU recovery fund gets signed off this week, this should increase hopes of a robust recovery in public and private spending in 2021, once the vaccine has been rolled out," he said.
European leaders are also set to finalize a 750 billion euro ($908 billion) recovery fund this week aimed at propping up the hardest-hit economies, highlighting the region's willingness to cushion negative impact using debt.
Net purchases under the bank's asset purchase programme will continue at a monthly pace of 20 billion euros ($24 billion), the ECB said in a statement.
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