December 10, 2020
The European Central Bank has announced a fresh burst of support as a resurgence of the coronavirus pandemic weighs on the eurozone recovery. New measures include an extension of its bond-buying program and more ultra-cheap liquidity to banks; as long as they keep passing the cash onto companies and consumers via new lending.
Interest rates on the ECB’s main refinancing operations, marginal lending facility and deposit facility remained frozen at 0.00%, 0.25% and -0.50%, respectively and the Governing Council said that it expects them 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%, consistently. Looking at current data, this seems a long way off – inflation came in sub-zero at -0.3% year-on-year in November, the same as in each of the previous two months. Despite a “commitment to symmetry”, the ECB expects only to have coaxed inflation up to 1.4% by 2023.
With regard to its asset purchasing program, the ECB upsized the pandemic emergency purchase program (PEPP) envelope by €500 billion to a total of €1.85 trillion. It also extended the horizon for net purchases under the PEPP to at least the end of March 2022 while proceeds of maturing investments will be invested until at least the end of 2023. This comes in addition to the asset purchase program (APP) which will continue at a monthly pace of €20 billion and run for as long as necessary to reinforce the accommodative impact of its policy rates. Key interest rates will not be increased until this program draws to a close.
In order to ensure the eurozone banks have sufficient liquidity, the ECB rolled out a flurry of new measures. It extended the period during which banks can get funds at -1%, subject to meeting certain lending conditions, by one year to June 2022 (while consensus was expecting a shorter 6 month extensions) and said it would host three additional tenders for 3-year loans, with the last one now scheduled for December 2021.
The ECB said: “The monetary policy measures taken today will contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability.”
The eurozone looks to be facing a very difficult winter, teetering on the edge of a double-dip recession and potentially facing a no-deal Brexit (or one with a very thin deal). The ECB has offered the eurozone some kind of windbreaker but as Lagarde herself commented, what is really needed is an ambitious and coordinated fiscal support package. This has been on ice lately due to disagreements hailing from Hungary and Poland on the rule of conditionality. We will now have to wait a few more hours to see if the optimism of Poland’s ruling party chief on a compromise related to the budget standoff is for real. Monetary policy can only provide cheap funding and attempt to alleviate the debt burdens of companies and consumers. It cannot stimulate demand and investment.
In any case, the ECB has put its best foot forward while the eurozone’s 350 million inhabitants wait for a coronavirus vaccine and for Europe’s leaders in Brussels to get a fiscal package percolating into the real economy.
Author: Group Investment Office