The European Central Bank on Thursday expanded its massive monetary stimulus program by another 500 billion euros ($605 billion), as a second wave of lockdown measures weigh on the euro area’s economic recovery.
Markets had largely expected the central bank to add to its bond buying, having vowed back in October to “recalibrate its instruments” as a resurgence in coronavirus cases across the continent led to further national shutdowns.
The ECB held interest rates on its main refinancing operations, marginal lending facility and deposit facility at 0.00%, 0.25% and -0.50%, respectively.
The central bank launched its Pandemic Emergency Purchase Programme (PEPP) earlier this year in a bid to shore up the bloc’s economy in the wake of the pandemic.
Following Thursday’s expansion, the total asset purchase value is now 1.85 trillion euros, and the ECB extended the horizon for purchases under the PEPP to March 2022. Reinvestments of assets maturing from the PEPP have also been extended until the end of 2023.
In a statement following the decision, the ECB said it would conduct net purchases until its Governing Council judges that the “coronavirus crisis phase is over,” and restated that interest rates would remain at their current low levels until the central bank sees the inflation outlook “robustly converge” to its target of “close to, but below” 2%.
“While today’s policy package may be somewhat unexciting for some market participants, the ECB will be pleased to have largely steered market expectations in the right way,” said Berenberg Economist Florian Hense.
“Unexciting if not almost boring — as in ‘the ECB watches the Eurozone economy’s back whatever betide’ — is exactly how the ECB wants to be seen.”
Euro rises
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.”
Banking stocks across Europe slipped by around 3% after the announcement. The euro gained 0.2% against the dollar following the decision, and the single currency has risen 8% against the greenback this year — posing yet another headache for the ECB.
ECB President Christine Lagarde restated in a subsequent press conference that the euro zone’s central bank does not target the 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, we will continue to monitor it very carefully going forward,” she added.
Uncertainty remains high
The Governing Council also opted to “recalibrate” the third edition of its targeted longer-term refinancing operations (TLTRO III), which are ultra cheap loans for banks, by extending the current favorable terms to lenders by 12 months until June 2022.
The ECB extended the amount that counterparties are entitled to borrow under the TLTRO III operations from 50% to 55% of their eligible stock of loans.
The newly recalibrated conditions will only be available to banks which meet a certain lending performance target. The ECB will also offer four additional pandemic emergency longer-term refinancing operations (PELTROs) over the course of 2021.
The bank noted that uncertainty remains high, including with regards to the timing of vaccine rollouts, but said the measures taken would support the flow of credit, underpin economic activity and ensure medium-term price stability.
“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,” it added.
