The European Central Bank (ECB) almost doubled the size of its pandemic emergency purchase program (PEPP) and extended it by a further six months in response to what it said was an “abrupt drop in economic activity” that is expected to lead to an economic contraction of 8.7 percent in 2020.
The central bank for the 19 European countries that share the euro currency boosted the size of its PEPP program by 600 billion euros to 1.350 billion and will now be purchasing assets, such as government or corporate bonds, until at least to the end of June 2021 or “until it judges that the coronavirus crises phase is over.”
The massive boost to the ECB’s asset purchases, also known as quantitative easing, comes as the bank’s staff sharply raised its estimate for the drop in economic output and inflation in response to the global measures taken to limit the spread of the Covid-19 pandemic.
“Incoming information confirms that the euro area economy is experiencing an unprecedented contraction,” ECB President Christine Lagarde said.
While recent data and surveys show some signs of a bottoming-out of the sharp drop in economic activity, Lagarde said the “improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months.
The economy of the euro area already shrank 3.8 percent in the first quarter of this year from the fourth quarter of 2019 and containment measures were only in place from mid-March.
The latest update of its economic forecasts sees “growth declining at an unprecedented pace in the second quarter of this year, before rebounding again in the second half, crucially helped by the sizable support from fiscal and monetary policy,” Lagarde said.
ECB staff expects the euro area economy to shrink 8.7 percent this year, up from the March forecast of growth of 0.8 percent and 2019’s growth of 1.2 percent.
Inflation is seen of only 0.3 percent, down from 1.2 percent in 2019 and the March forecast of 1.1 percent, and well below the ECB’s target of close to, but below 2.0 percent.
In May inflation is estimated to plunge to only 0.1 percent from 0.3 percent in April.
Boosted by its own massive stimulus and other European government measures to support economic activity, such as the German-French proposal for a 500 billion euro virus fund and European Council’s 540 billion euro safety net, the euro area economy is seen bouncing back.
Gross domestic product in 2021 is forecast to expand by 5.2 percent and then another 3.3 percent in 2022 while inflation is seen rising to 0.8 percent in 2021 and 1.3 percent in 2022.
Given the uncertainty around the length of the pandemic and thus the economic recovery, the ECB also published two alternative projections.
In addition to expanding the size and length of its PEPP program, the ECB will also reinvest maturing principal payments from securities purchased until at least the end of 2022.
The ECB’s stimulus measures come as its interest rates are already at rock bottom, with the benchmark refinancing rate at 0.0 percent and the lending rate at 0.25 percent since March 2016 and the deposit rate at minus 0.50 percent since September 2019.
Lagarde confirmed the ECB’s guidance that it expects to maintain rates “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
While the ECB’s PEPP program initially was launched in March, it is also engaged in further stimulus measures, such as its asset purchase program (APP), which will continue purchasing bonds and other securities at a monthly pace of 20 billion euros together with an additional envelope of purchases of 120 billion until the end of this year.
The ECB confirmed that it expects to continue with the monthly purchases under APP “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.”
The expansion of PEPP follows the ECB’s cut to the interest rates on its targeted longer-term refinancing operations (TLTRO III) in April when it also launched another program to boost liquidity in the euro area financial system known as PELTRO, or non-targeted pandemic emergency longer-term refinancing operations.
In April the ECB had also said it was fully prepared to raise the size of PEPP.
The European Central Bank issued the following statement with its policy decisions and an introductory statement by its president, Christine Lagarde: