Brussels — The European Central Bank (ECB) intensified its response to the coronavirus recession with a bigger-than-expected increase to its emergency bond-buying programme.
At a virtual meeting on Thursday, president Christine Lagarde and colleagues decided to expand the amount of purchases by €600bn and extended their duration until at least the end of June 2021. The majority of economists surveyed by Bloomberg last week expected policymakers to boost buying by €500bn.
Italian bonds rallied and the euro reversed losses after the decision, which reflects how Europe is finally coming together with vast spending plans to drag the economy out of its worst recession in living memory. Germany announced a new €130bn fiscal package late on Wednesday, the latest in a raft of national programmes, and the EU has proposed a €750bn joint recovery fund that leaders will discuss later in June.
“This is a bit of an economics-policy fireworks, last night the German government with an enormous fiscal stimulus package, and now the ECB,” said Carsten Brzeski, chief eurozone economist at ING. “This is huge and really shows that German policymakers, from both fiscal and monetary, are working together.”
The ECB’s asset purchases should keep a lid on borrowing costs for governments as they issue debt to finance their support. The central bank said they would be conducted in a “flexible manner over time, across asset classes and among jurisdictions”, with proceeds from maturing bonds reinvested at least until the end of 2022.
The decision fits into Lagarde’s pledge to spare no efforts to protect the single currency and should help dispel concern that policymakers’ scope for action is limited after a German court ruling in May questioned the legality of an older, still-active bond-buying programme.
European countries are slowly emerging from lockdowns that put their economies into a deep freeze for more than two months. Lagarde has already said that the recession in 2020 will probably be somewhere between the central bank’s medium and worst-case scenarios, signalling a contraction of about 10%. Inflation in the eurozone slowed to just 0.1% in May, adding to the case for more monetary stimulus.
“The strong signal can bolster the nascent rebound in the confidence of households and companies that the worst will soon be over,” Holger Schmieding, chief economist Berenberg, said in a report to clients. “This strengthens our call for a tick-shaped recovery.”
However, about two-thirds of the €750bn in pandemic purchases announced in March have not been spent. The early top-up suggests the central bank is not willing to second-guess how long bond investors can wait before demanding higher borrowing costs from the region’s most-indebted nations.
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 Covid-19.
Thursday’s decision highlights emergency bond purchases as the ECB’s main crisis fighting tool. In the first weeks of the programme, the central bank skewed purchases towards Italy in a bid to keep borrowing costs in check, using the greater flexibility of the scheme compared to the institution’s regular quantitative-easing plan.
Italian bonds erased losses, sending the yield on 10-year bonds down as much as 17 basis points to 1.39% and narrowing its premium over German peers to 176 basis points.
Policymakers have refrained from cutting interest rates further below zero amid opposition to negative rates from banks and some politicians.