ECB Unveils Bigger-Than-Expected Boost to Crisis Bond Buying

The European Central Bank intensified its response to the “unprecedented contraction” facing the euro area with a bigger-than-anticipated increase to its emergency bond-buying program.

At a virtual meeting on Thursday, President Christine Lagarde and colleagues decided to expand the amount of purchases by 600 billion euros ($675 billion) and extended their duration until at least the end of June 2021. The vast majority of economists surveyed by Bloomberg last week expected policy makers to boost buying by 500 billion euros.

Italian bonds rallied and the euro reversed losses after the announcement.

Follow our TOPLive blog on the ECB decision and briefing.

While there are nascent signs of the downturn bottoming out, “the improvement has so far been tepid,” Lagarde said in a press conference. “Action had to be taken.”

She revealed sweeping downward revisions to the ECB’s projections for growth and inflation in the region. In 2020, the bloc will likely see a contraction of 8.7% before rebounding by 5.2% in 2021. Price growth will accelerate only slowly, and is seen averaging 1.3% by 2022 — far from the ECB’s goal of just below 2%.

The ECB action reflects how Europe is finally uniting with vast spending plans to drag the economy out of its worst recession in living memory. Germany announced a new 130 billion-euro fiscal package late Wednesday, the latest in a raft of national programs, and the European Union has proposed a 750 billion-euro joint recovery fund that leaders will discuss later this month.

It also shows Lagarde is determined to act fast and on a large scale — only about a third of the 750 billion euros in the pandemic program have been spent — to keep markets calm, building on the strategy of her predecessor Mario Draghi. She got off to a shaky start in the pandemic when she inadvertently signaled that she might not step in to calm bond volatility in stressed economies such as Italy.

“This is a bit of an economics-policy fireworks, last night the German government with an enormous fiscal stimulus package, and now the ECB,” Carsten Brzeski, chief euro-region economist at ING, told Bloomberg Television. “This is huge.”

The ECB’s asset purchases should keep a lid on borrowing costs for governments for some time. The central bank said they would be conducted in a “flexible manner over time, across asset classes and among jurisdictions.” The proceeds from maturing bonds will be reinvested at least until the end of 2022.

What Bloomberg’s Economists Say

“The large expansion of the Pandemic Emergency Purchase Programme creates a huge reserve of fire power to stimulate the economy and prevent any countries in the euro area from being engulfed by a sovereign debt crisis.”

-David Powell and Maeva Cousin. read their ECB REACT

The central bank had already sweetened the terms of its liquidity operations in April so that lenders keep extending credit to companies, many of which have seen their revenues eroded by the shutdowns to limit the spread of the virus. Policy makers have refrained from cutting interest rates further below zero amid opposition to negative rates from banks and some politicians.

Lagarde said policy makers didn’t discuss whether to include junk-rated debt in its asset purchases, aside from the exceptions currently being granted to Greek government bonds. She said there was a “unanimous view” in the Governing Council that action had to be taken, but the exact parameters ultimately decided were the result of a “broad consensus.”

The ECB President also pushed back against concerns that scope for action could be limited after a German court ruling last month questioned the legality of an older, still-active bond-buying program. She said she’s “confident that a good solution will be found.”

Read more:

  • Merkel Stimulus Seals German Shift From Frugality to Largess
  • Europe’s Virus Aid Stems Mass Jobs Destruction in Labor Shock

— With assistance by Alaa Shahine, Zoe Schneeweiss, Piotr Skolimowski, Fergal O’Brien, Craig Stirling, Catherine Bosley, Brian Swint, Alexander Michael Pearson, Daniel Schaefer, Iain Rogers, David Goodman, Jill Ward, Lucy Meakin, Dana El Baltaji, Jeannette Neumann, and Kristian Siedenburg

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