The ECB just announced $676 billion of new stimulus to fight the coronavirus

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The ECB just announced $676 billion of new stimulus to fight the coronavirus
Reuters/Brendan McDermid
  • The European Central Bank increased its Pandemic Emergency Purchase programme by a further 600 billion euros ($676 billion) on Wednesday.
  • Markets were largely expecting a 500 billion euros ($563 billion) increase.
  • The new package takes the ECB's total announced monetary stimulus to 1.35 trillion euros ($1.52 trillion).
  • ECB left key interest rates unchanged.
  • ECB also extended its horizon for net purchases until at least June 2021.

The European Central Bank announced added a further 600 billion euros ($676 billion) to its coronavirus rescue plan Thursday, bringing the total stimulus package to an astonishing 1.35 trillion euros ($1.52 trillion).

Markets were largely pricing in a 500 billion euros increase ($563 billion) to the ECB's so-called Pandemic Emergency Purchase programme.

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The European Central Bank said in a statement: "In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households."

The ECB also extended the horizon for net purchases under PEPP until at least June 2021.

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The euro to dollar exchange rate jumped about 0.5% to a daily high of $1.13.

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The announcement of a huge new injection of monetary stimulus comes the after the European Commission proposed a €750 billion ($826 billion) fiscal stimulus programme.

But the ECB left key interest rates unchanged as part of Thursday's announcement.. The main refinancing operations stood at 0.00%, rates of marginal lending facility were 0.25%, and the deposit facility stood at -0.5%.

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The ECB said: "The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon."

Analysts welcomed the package

Most European markets rose on the ECB's announcement.

The Euro Stoxx 50 and Germany's DAX both jumped after the announcement, but quickly pared those gains.

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Share prices in a number of European banks also rose. Italian banking giant Unicredit's shares rose 3% on the announcement

Neil Birrell, chief investment officer at Premier Miton, said: "[The announcement] reflects the 'we will do what it takes' mentality of central bankers. The policy support is likely to keep markets happy, particularly as some of the economic data is improving as lockdown loosens."

Kieran Cleere, director of market risk solutions at SVB, said: "Whilst, as expected, the refinancing rate was left unchanged the ECB's added stimulus came in at the upper end of market expectations seeing a rally in the single currency immediately following the announcement.

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Cleere added: "The market will watch with interest for the central banks economic outlook and the shape and scale of the anticipated recovery at this afternoon press conference."

Naeem Aslam, chief market analyst at Avatrade welcomed the announcement but said the situation is not as dire as it was 2 months ago.

Aslam said: "Any support from the ECB in the form of QE or aid package is going to strengthen the eurozone economy which is on its knees."

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He added: "But things have started to improve as the situation with respect to coronavirus has come under control, and the liquidity situation isn't as dire as it was 2 months ago. Nonetheless, we have seen a massive spike in the euro against the dollar because it saves the eurozone from its misery."

Inflation?

Ulas Akincilar, head of trading at Infinox pointed out that ECB's gigantic stimulus package may generate inflation, "something the influential Germans have traditionally been allergic to."

"But the bank's monetary policy grandees have clearly decided that worries about inflation must wait for another day. Now their focus is entirely on seeing off the existential crisis that Europe's looming depression poses.

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"In fact the inflationary blowback from firing the Euro bazooka may even provide a second benefit if it spares the Eurozone from a destructive cycle of stagflation," Akincilar added.

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