Euro Area: ECB ramps up quantitative easing at June meeting
On 4 June, the European Central Bank (ECB) stepped up its efforts to shore up the economy from the fallout of the global health crisis and prevent financial shockwaves. The ECB therefore ramped up its quantitative easing program, while at the same time it maintained rates unchanged at all-time lows to support liquidity conditions and preserve the smooth functioning of money markets.
The ECB ramped up the size of its EUR 750 billion emergency quantitative easing program (PEPP) by a further EUR 600 billion, bringing the new total to EUR 1,350 billion. Moreover, it extended the time horizon of the net purchases under the PEPP to at least until the end of 2021, while it also announced it will reinvest the proceeds from these purchases until at least 2022. It also added the purchases will be conducted in a flexible manner, in order to guarantee a smooth monetary policy transmission. In parallel, the ECB kept rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively.
The additional firepower was deployed to cushion the unprecedented economic collapse in the Euro Area and sustain a recovery as member states gradually ease restrictions. GDP fell at a historic pace in Q1; labor markets continued to deteriorate dramatically in April; and consumer and business confidence remained extremely downbeat in May, despite recovering some lost ground. That said, the gradual reopening of the regional economies in May and most recent indicators suggest some bottoming-out. On top of that, inflation dropped to an over four-year low in May on the back of slumping energy prices and is expected to decline further over the coming months, prompting the Bank to affirm it stands ready to “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.
After suffering unprecedented economic damage from lockdowns in H1, the regional economy is expected to rebound in Q3 and onwards, as government ease containment measures further and on the back of supportive fiscal and monetary policy stances. That said, the duration and intensity of the impact will depend crucially on the duration and the effectiveness of the containment measures, the spillovers on demand plans and supply chains, as well as on the fiscal response. With regards to the latter, President Christine Lagarde again urged member states to adopt a coordinated fiscal response to the crisis on top of the safety nets endorsed by the EU institutions. At the same time, she stressed fiscal measures should be targeted and temporary, to ensure medium-term fiscal sustainability.
Commenting on the latest ECB decision, Carsten Brzeski, chief Germany economist at ING, noted:
“For the time being, the ECB today has added to the recent tailwinds for the eurozone economy. After the announcement of the European Recovery Plan and last night’s powerful German fiscal stimulus package, today’s decision should dent any future speculation about whether or not the ECB is willing to play its role of lender of last resort for the Eurozone.”