Euro Area: ECB ramps up stimulus measures at December meeting
On 10 December, the European Central Bank (ECB) decided to adopt a raft of new stimulus measures in order to lift the economy towards recovery. Specifically, the Bank ramped up its emergency quantitative easing program and extended its duration, and at the same time it decided to continue the reinvestment of maturing securities, and launched a series of auctions to finance banks at negative rates. Meanwhile, it left rates on the main refinancing operations, the marginal lending facility and the deposit facility unchanged at their respective all-time lows of 0.00%, 0.25% and -0.50%.
The Bank deepened its expansionary monetary policy stance in order to support the recovery until vaccines are rolled out across the region. Consequently, it increased the securities purchases under the pandemic emergency purchase program (PEPP) by EUR 500 billion, bringing the new total to EUR 1,850 billion, and extended the time horizon by nine months—until at least March 2022 and in any case until the health crisis is over. Moreover, the ECB extended its reinvestment of maturing securities purchased under the PEPP until at least the end of 2023, in order to not interfere with monetary policy. Additionally, the Bank launched another tranche of targeted longer-term refinancing operations (TLTRO III), offering financing at rates of minus 1.0% until June 2022, extending the scheme by a year, for banks that have reached new lending targets. Lastly, the ECB will conduct four more pandemic emergency longer-term refinancing operations (PELTRO) liquidity auctions in 2021.
The economy rebounded sharply in the third quarter amid the easing of Covid-19-related restrictions and loose fiscal and monetary policies. However, available data points to waning momentum in Q4, especially in the services sector, due to the reintroduction of containment measures throughout Europe, prompted by surging Covid-19 cases. Moreover, consumer prices continued to fall on an annual basis in October–November and are expected to keep falling until the beginning of 2021. As such, the ECB revised its estimates and now sees GDP falling by 7.3% in 2020, and rising by 3.9% in 2021 and 4.2% in 2022. At the same time, annual average inflation is expected to increase from 0.2% this year to 1.0% next year and 1.1% (from 1.3%) in 2022.
Against this backdrop, although the Bank stressed the importance of “an ambitious and coordinated fiscal stance” to fuel the recovery—and in this respect, it recognized the key linking role of the Next Generation EU package— it also highlighted how crucial the implementation of productivity-enhancing structural policies will be to raise growth potential and increase economic resilience.
Commenting on the latest ECB decision, Carsten Brzeski, chief Eurozone economist at ING, noted:
“The ECB continues to follow two main aims: keep financing conditions as favourable as possible and prevent any new euro crisis on the back of an unwarranted widening of government bond yields (a.k.a. keeping the transmission mechanism smooth). The ECB has linked its policies to the virus and the vaccine. All measures are now timed and tied to the assumption that the vaccine will bring herd immunity in all eurozone countries by the end of 2021. Tweaking the duration of all measures is still possible, a real stepping up of the measures is really not. For the time being, the ECB is leaving the big bazookas to governments and concentrating on real central bank engineering.”