ECB ramps up eurozone support as pandemic persists

( Buying a lot more bonds, and for a lot longer. ©AFP/File Daniel ROLAND )

Sharply downgraded growth and inflation forecasts and uncertainty about the course of the coronavirus pandemic prompted the European Central Bank to again pump up its support to the eurozone economy Thursday.
Announcing 600 billion euros ($674 billion) more of emergency bond-buying and the scheme’s extension until June 2021, President Christine Lagarde warned that recovery from infection control shutdowns could be slow in materialising.
As countries gradually begin to reopen, there are signs of the slump “bottoming out”, Lagarde said, after just 0.1 percent growth in January-March and a likely “significant contraction” in the second quarter. 
But “the improvement has been tepid compared with the speed at which economic indicators plummeted in the preceding months”, the former French finance minister added.
Thursday’s decisions bring the maximum amount of government and corporate bonds targeted under the Pandemic Emergency Purchase Programme (PEPP) policymakers agreed in March to 1.35 trillion euros.
“The PEPP expansion will further ease the monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households,” Lagarde said.
Also still in place are hundreds of billions of euros in bond buys already planned under a separate, pre-pandemic stimulus scheme, interest rates stuck at historic lows and a massive programme of cheap loans to banks.
With a bigger-than-predicted expansion of PEPP, Thursday’s ECB moves were a “strong signal (that) can bolster the nascent rebound in the confidence of households and companies that the worst will soon be over,” said Berenberg bank economist Holger Schmieding.

– Sights on inflation –

The ECB’s central scenario for economic growth in the eurozone calls for an 8.7 percent contraction this year, followed by 5.2 percent growth in 2021 and 3.3 percent in 2022.
Lagarde also highlighted inflation expectations downgraded to 0.3 percent this year, 0.8 percent in 2021 and 1.3 percent in 2022 — far short of the central bank’s target of just below two percent.
“There was a unanimous view in the governing council that action had to be taken in the face of that inflation outlook,” she said.
The renewed focus on price growth was “the return of the one-needle compass” guiding central bank action, commented ING bank economist Carsten Brzeski.
“More monetary stimulus further down the road should not be excluded”.
Such messages are also clearly directed at red-robed judges 90 minutes’ drive from the bank’s Frankfurt headquarters.
The German Constitutional Court (GCC) in Karlsruhe last month demanded proof of the “proportionality” of ECB bond-buying.
That prompted Lagarde to repeatedly restate Thursday that central bank governors had examined “the effectiveness, the efficiency and the cost-benefit of its monetary policy measures… in great depth”.
She also reiterated that the ECB was subject not to national courts but to the Court of Justice of the European Union, which has validated its actions.

– High hopes for Brussels –

Last week’s announcement of a 750-billion-euro post-virus recovery fund for the European Union paid for by joint borrowing was welcomed at the ECB, which in previous crises was seen as the sole pillar holding up the bloc.
Central bank governors “do not doubt for a second the determination of European leaders at large to really respond to the challenge of the pandemic,” Lagarde said, adding that fiscal and monetary policy are now “working hand in hand”.
But the proposal will yet be reshaped by the European Council of national leaders and the need to pass a vote in the European Parliament, she added.
Heavyweight economy Germany has already pressed ahead with plans for a 130-billion-euro stimulus package of its own to jump-start recovery.
Away from big headline numbers, the fine print of ECB programmes will also interest markets, Pictet Wealth Management strategist Frederik Ducrozet commented.
Reinvesting the proceeds from PEPP bond purchases “will allow the ECB to deviate to a greater extent from capital keys” that constrain its other schemes.
That would allow targeted support to more heavily-indebted euro members like Italy rather than rigidly buying bonds in line with member nations’ share in the ECB’s capital.
– Frankfurt am Main (AFP)