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June 04, 2020 09:53 AM

ECB almost doubles coronavirus stimulus to $1.5 trillion

Sophie Baker
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    Christine Lagarde, president of the European Central Bank
    Bloomberg

    Christine Lagarde, president of the European Central Bank, during a live stream of the central bank's rate decision news conference Thursday. The ECB intensified its response to the coronavirus recession with a bigger-than-anticipated increase to its emergency bond-buying program.

    The European Central Bank increased its emergency COVID-19-related asset purchase program by €600 billion ($666 billion) to €1.35 trillion.

    The central bank launched its €750 billion Pandemic Emergency Purchase Program in March in an effort to "counter the serious risks" posed to the region by the coronavirus crisis.

    The ECB also extended the time frame of purchases under its emergency measure, which is in addition to a €20 billion a month asset purchase program that has been in place since November. PEPP will now run until at least the end of June 2021. PEPP was originally set to run until the end of this year.

    Maturities will be reinvested until at least the end of 2022.

    "The PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households," Christine Lagarde, president of the ECB, said Thursday in a press conference announcing the bank's monetary policy decisions. "Purchases will continue to be conducted in a flexible manner — over time, over asset classes and among jurisdictions. This allows us to effectively stave off risks to the smooth transition of monetary policy," she said.

    See more of P&I's coverage of the coronavirus

    Ms. Lagarde said the ECB's governing council increased the size and duration of the PEPP due to two main factors. The first was a revision of the bank's inflation outlook, with a medium-term projection — to 2022 — revised to 1.3% from 1.6% in March.

    The second factor "is that financial conditions for the (eurozone) as a whole are significantly tighter today as measured by average sovereign yields and broader metrics of financial tightness, in a situation where the economy needs easier conditions to achieve price stability. So in that context we judged that it was necessary to increase the size," Ms. Lagarde said. She added that the decision that "action had to be taken" was unanimous among members of the governing council.

    Prior to the coronavirus-related emergency purchase program, the ECB's monthly asset purchases were set at €20 billion. The ECB expects its original asset purchase program to run "for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates," Ms. Lagarde said.

    "The ECB is turning up its monetary hose," Neil Williams, senior economic adviser to Federated Hermes' international business, said in a comment. "Extending and ramping up its asset purchases by €600 billion means it can continue running QE in 2021 at over €100 billion per month."

    He noted that the new monthly purchase rate "is way up on the €20 billion run-rate pre-virus, and even the €80 billion during its own, 2015 euro crisis."

    Europe's "fiscal box is now opening," having lagged monetary policy in the U.K. and U.S. to slash interest rates, Mr. Williams added.

    The size of the expansion caught markets by surprise, David Zahn, head of European fixed income at Franklin Templeton, said in a comment.

    "Markets were widely expecting the ECB to increase the program by between €250 (and) €500 billion and the increase of €600 billion has ensured the ECB remains on the front foot as it looks ahead to 2021. In our view, Lagarde's comments today also demonstrate that she continues to expect that the European recovery must be borne by the national governments via strong and ambitious fiscal action vs monetary policy."

    The ECB also kept interest rates unchanged.

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