European Central Bank Expands Stimulus by $606 Billion as Economy Slows Down

By Mariliana Fotopoulou Thursday, December 10, 2020

European Central Bank (ECB) has decided to increase the size of its Pandemic Emergency Purchase Programme (PEPP) by a further €500 billion ($606 billion) until March 2022. The aim is to increase support available to its member states to revive their economies from the COVID-19 pandemic.

Balancing Needed

Analysts were widely expecting the ECB to increase the PEPP. Today’s announcement is likely to help improve the long-term risk sentiment.

“Essentially, this is all good news for risk as the measures taken by the ECB ensures that liquidity and credit conditions will be sufficient for a long time to go. The 9-month extension of the PEPP stimulus may yet be the sweet spot between a supposedly debated 6-month and 12-month extension in the lead up to the meeting,” Forexlive analyst Justin Low said.

Prior to the meeting, analysts expected ECB to maintain the balance between the broadening range of short-term risks and improving the long-term outlook.

“With the positive news in terms of vaccine development, Europe is now starting to see the light at the end of the tunnel,” analysts from Oxford Economics said.

“However, the short-term outlook remains extremely challenging, with eurozone GDP likely to contract in the fourth quarter.”

Right now, the eurozone is going through a challenging period as it’s battling with the second wave of the pandemic, a possible no-deal Brexit, and a deadlock over the European Union’s €750 billion ($909 billion) recovery fund.

However, all of the challenges are expected to be short-term as the political stalemate is likely to get resolved in the future while the number of COVID-19 infections is expected to drop by the spring.

After the first wave of the pandemic, the economy started recovering ground quickly with new estimates suggesting a slower growth next year and a much better outlook in 2022.

In the weeks leading up to Thursday’s meeting, ECB President Christine Lagarde has made it clear that a bigger PEPP system and more subsidized long-term loans for banks will form the backbone of policy measures, even if other moves are possible.

Low inflation rates will also reflect the “low for longer” concept while ECB’s estimates point to a price growth far below the bank’s 2% target even in 2023, which would make it an 11th consecutive year the bank would fall short of its goal.

“The ECB’s tools may be most effective at calming markets in crisis situations and keeping financial conditions very easy via a ‘low for very long’ stance,” said Greg Fuzesi, an economist at JPMorgan.

“But, when monetary policy is already doing a lot, it looks more constrained when trying to give the economy an extra kick to boost inflation closer to the target.”

Economy Slows Down, Euro Higher

Financial markets have reacted sharply to the recovery process as global stocks reached all-time peaks earlier this week, with spreads between eurozone government bond yields narrowing, and the euro hitting a two and a half year high against the US dollar at $1.2177.

The euro remained stable after the ECB introduced the new stimulus measures, while the British pound declined on the extension of Brexit trade talks through the weekend.

Referring to the economists’ expectations on PEPP growth, You-Na Park-Heger, an analyst at Commerzbank said:

“These adjustments are unlikely to have a significant effect on the euro even if the adjustments are going to be a little more pronounced than the market expects.”

Park Heger added that another unexpected development could occur if Christine Lagarde, President of the ECB, would take a “bazooka” position against the recent rally in euro’s price, arguing that “we are unlikely to see more than a toothless tiger today.”

In the UK, the Office for National Statistics said the country’s economic recovery made almost no progress in October following a sharp rise in coronavirus infections that battered the hospitality industry.

Britain’s Gross domestic product climbed only 0.4% in October, matching the estimates from a Reuters poll.

Over 62,000 people have died in the UK from the coronavirus, the highest in Europe, and has taken the biggest economic blow after GDP plummeted by a huge 19.8% in Q2 2020.

Summary

The European Central Bank has launched fresh stimulus measures to facilitate the recovery of Eurozone countries from the devastating COVID-19 pandemic until the vaccine rollout.

About the Author


Headshot for author Mariliana Fotopoulou

Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.

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