European Central Bank policymakers surprised on Thursday with a bigger-than-expected boost to their pandemic emergency bond-buying scheme, adding 600 billion euros and extending it until mid-2021.
“The envelope for the pandemic emergency purchase programme (PEPP) will be increased by 600 billion euros ($674 billion) to a total of 1.35 trillion,” an ECB spokeswoman said.
The emergency scheme will be extended to “at least the end of June 2021” rather than December this year, she added, or until the ECB’s governing council “judges that the coronavirus crisis phase is over”.
Governors also agreed to reinvest the proceeds from their PEPP purchases “until at least the end of 2022”, saying that any future winding-down of the massive expansion in the ECB balance sheet would be “managed” to avoid disruption to financial markets.
ECB President Christine Lagarde was due to detail the thinking behind policymakers’ decisions at a 1230 GMT press conference – and present formal growth and inflation forecasts from central bank staff, after warning last week that the eurozone economy could contract by between 8-12% this year.
After initially shocking markets early on in the pandemic by downplaying the need to step in, the ECB has made massive interventions in the eurozone economy to keep up access to credit for companies, households and governments.
Pictet Wealth Management strategist Frederik Ducrozet highlighted the importance of reinvesting the proceeds from bonds held by the central bank.
“It should allow the ECB to deviate more, and for longer, from capital keys,” he tweeted, targeting its support to individual countries rather than rigidly buying bonds in line with member nations’ share in the ECB’s capital.
Such signals may be more important to markets than the headline increase in bond-buying, as the bank was unlikely to exhaust its ammunition anytime soon at its present purchase pace.
“The strong signal can bolster the nascent rebound in the confidence of households and companies that the worst will soon be over,” Berenberg bank economist Holger Schmieding said.
Hints at further action could come in the ECB’s inflation forecasts, as the central bank’s main task is to ensure price stability in the 19-nation eurozone.
Price growth slowed to just 0.1% year-on-year in May from 1.2% in February before the pandemic and well below the ECB’s target of close to, but just below 2%.
Meanwhile, the euro’s growing strength against the dollar is creating a headwind for exports.
Governors met on Thursday less than a month after a German Constitutional Court (GCC) ruling that a two-trillion-euro bond-buying scheme launched in 2015 may not have been “proportionate” to its price stability goal and needed to be clarified.
If the ECB cannot satisfy the judges, the German Bundesbank central bank may not be able to participate in bond-buying.
While finding a face-saving solution to the immediate legal headache, policymakers must also consider how court challenges might limit their future options.
With Thursday’s decisions, “the ECB is also demonstrating that it remains a truly independent institution fully committed to its mandate of price stability – and is not in any way constrained by the verdict,” Berenberg economist Schmieding said.
ECB governors will also be aware that long-awaited help on the fiscal front remains some way off, as leaders are just getting started debating a 750-billion-euro pandemic recovery fund proposal from the European Commission.
While Germany last month abandoned some of its red lines in a deal with France, including on the emotive question of joint debt issued from Brussels, a so-called “frugal four” group including Austria and the Netherlands are fighting a rearguard action.
But Lagarde is likely to welcome a fresh stimulus package announced by the German government late on Wednesday, which will see it pump 130 billion euros into Europe’s top economy to jumpstart the coronavirus recovery.