European Central Bank nearly doubles pandemic support scheme
THE EUROPEAN Central Bank, ECB, has boosted its pandemic emergency support programme by an unexpectedly large €600 billion to €1.35 trillion (US$1.5 trillion), adding to a range of efforts in Europe and around the world to help the economy weather the steep downturn caused by the coronavirus outbreak.
The ECB measures announced Thursday aim to keep affordable credit flowing to the economy amid uncertainty about the speed of any recovery, following the easing of lockdowns across Europe.
The new stimulus comes on top of added spending by governments and similar efforts by the United States Federal Reserve, the Bank of England, the Bank of Japan and others around the globe, as the world tries to cope with a sharp, simultaneous blow to both developing and rich economies.
The central bank for the 19 countries that use the euro expects the bloc’s economy to shrink by a painful 8.7 per cent this year and to recover by a more modest 5.2 per cent in 2021. President Christine Lagarde warned that “the speed and scale of the rebound are highly uncertain”.
Lagarde removed a face mask as she walked into an empty press room at the bank’s skyscraper headquarters in Frankfurt for the online news conference after the policy meeting of the bank’s 25-member governing council, which was conducted by teleconference.
She cautioned that even though lockdown measures are being eased, a significant rebound was not yet in sight.
“While survey data and real-time indicators for economic activity have shown some signs of a bottoming-out alongside the gradual easing of the containment measures, the improvement has so far been tepid compared with the speed at which the indicators plummeted in the preceding two months,” she said.
The ECB’s moves reflect similar concerns to those motivating other central banks, including the Fed, which has slashed short-term interest rates to near zero and started buying US$2 trillion in Treasury securities and mortgage-backed bonds to keep credit markets functioning.
Buys financial assets
Under the pandemic support programme, the ECB buys corporate and government bonds and other financial assets from banks, paying with newly created money. That helps lower longer-term interest rates, keeping the pandemic from drying up needed funding for borrowers. On Thursday, it said it was extending its duration to at least the end of June next year, from the end of 2020 currently.
The large size of the intended purchases also sends a signal to financial markets that the ECB is determined to ensure interest rates remain low throughout the Eurozone and prevent borrowing costs from rising for indebted governments such as Italy.
While the ECB says its purchases are not targeted at supporting Italy, the programme so far bought a larger share of Italian bonds than for other countries and is credited with keeping market pressure off a nation that has been among the hardest hit by the pandemic.
The support from the ECB comes on top of up to €540 billion in financial aid from Eurozone governments that includes credit lines from the euro bailout fund, as well as a longer-term EU recovery fund of €750 billion that is still being worked out. Germany, the largest member economy, on Wednesday agreed on an additional €130 billion of stimulus, including tax breaks and subsidies for buying electric cars.
The European Central Bank left its key interest rate benchmarks unchanged at record lows. The rate at which it lends to commercial banks is zero. Its rate on deposits left overnight by commercial banks is now minus 0.5 per cent, a penalty aimed at pushing banks to lend the excess cash. The ECB has also set up long-term offers of credit to banks at even lower rates if they show they are lending to companies.
The ECB said it would also continue an earlier bond-purchase programme started before the pandemic. Those purchases will continue to run at €20 billion per month, providing still more monetary stimulus.