ECB rolls out fresh stimulus package amid pandemic resurgence

FRANKFURT -- The European Central Bank (ECB) said on Thursday that it decided to expand the pandemic emergency purchase program (PEPP) by another 500 billion euros (605 billion U.S. dollars) and extend the duration of the program to at least the end of March 2022, as part of a fresh stimulus package to bolster the economy.

The newly announced measures were taken "in view of the economic fallout from the resurgence of the pandemic," the ECB said in a statement after a monetary policy meeting.

The PEPP was first launched in March this year and was expanded by 600 billion euros in June. The program now stands at a total of 1.85 trillion euros.

The ECB also strengthened support for bank lending, namely the third series of targeted longer-term refinancing operations (TLTRO III). It will extend the temporary favorable terms for the program to June 2022, and add three additional operations between June and December 2021.

Four additional pandemic emergency longer-term refinancing operations (PELTROs) will be offered in 2021, which will continue to provide an effective liquidity backstop, the ECB also said.

Eurozone key interest rates will remain at ultra-low levels, with the base interest rate, marginal lending rate and deposit rate unchanged at 0.00 percent, 0.25 percent and minus 0.50 percent, respectively.

The ECB also extended the duration of many temporary favorable conditions announced earlier this year. It extended reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023, and also extended the duration of the set of collateral easing measures announced in April this year to June 2022.

The regular asset purchase program (APP) will continue at a monthly pace of 20 billion euros, it added.

REVISED OUTLOOK

Despite the stronger-than-expected rebound of economic activity in the third quarter and encouraging prospects for vaccine roll-out, the pandemic "continues to pose serious risks to public health and to the euro area and global economies," ECB President Christine Lagarde said at the press conference.

Incoming data and ECB staff projections suggest "a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged," Lagarde said.

The baseline scenario of the December ECB staff projections foresees euro area annual real GDP growth at minus 7.3 percent in 2020, 3.9 percent in 2021, 4.2 percent in 2022 and 2.1 percent in 2023. Compared with the projections in September, the outlook was revised down in the short-term, before largely recovering to previously projected levels in the medium term.

Headline inflation for the currency bloc, which has stayed below zero since August, is likely to remain negative until early 2021, according to Lagarde. The ECB staff foresees annual inflation at 0.2 percent in 2020, 1.0 percent in 2021, 1.1 percent in 2022 and 1.4 percent in 2023.

UNCERTAINTY REMAINS

The ECB stimulus came as the continent is dealing with a new wave of COVID-19 infections, with many countries re-imposing containment measures in the run-up to holiday season.

Lagarde said Thursday that "uncertainty remains high," including the dynamics of the pandemic and the timing of vaccine roll-outs.

Citing estimates from scientists and health experts, Lagarde said that sufficient herd immunity is likely to be reached by the end of 2021, when the economy, especially the service sector, could be functioning under more normal circumstances.

She noted that one of the key goals for the policy measure package is to preserve favorable financing conditions, adding that the ECB will have the flexibility to tailor purchases under its bond-buying programs according to market conditions.

Lagarde also reiterated that the ECB will monitor the value of the euro "very carefully." Although the ECB does not target exchange rate, the appreciation of the euro is likely to put downward pressure on prices, she said.

Regarding fiscal policies, Lagarde said the Governing Council recognizes the key role of the Next Generation EU package and stresses the importance of it becoming operational without delay.

Thursday's measures were largely in line with market expectations, as ECB's policymakers have previously signaled that an updated pandemic response would come in December.

The ECB is giving itself a lot of flexibility with the design of its measures, especially with regard to keep interest rates low in the countries hardest hit by the pandemic and to prevent further divergence in the euro area, Marcel Fratzscher, president of Berlin-based German Institute for Economic Research, wrote in a comment.

Friedrich Heinemann, an economist from the Leibniz Center for European Economic Research in Mannheim, said the big task facing the Governing Council next year is how to communicate the exit from the bond purchases carefully and still credibly. (1 euro = 1.21 U.S. dollars)