ECB increases pandemic support programme to $1.52 trillion
European Central Bank seeks to rebuild economic confidence by adding $676bn to Pandemic Emergency Purchase Programme.
The European Central Bank (ECB) has decided to ramp up its monetary stimulus scheme to 1.35 trillion euros ($1.52 trillion), seeking to rebuild economic confidence shattered by the coronavirus crisis and the renewed threat of deflation.
The Frankfurt-based bank on Thursday beefed up its 750-billion-euro ($840bn) Pandemic Emergency Purchase Programme (PEPP) by a further 600 billion euros ($676bn).
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The programme, which was launched in March and was due to expire at the end of this year, has also been extended until at least June 2021, the bank said.
Under PEPP, 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.
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.
Interest rates
The ECB – the central bank for 19 European countries – left its key interest rate benchmarks unchanged at record lows on Thursday.
The rate at which the ECB lends to banks is zero. Its rate on deposits left overnight by commercial banks is now minus 0.5 percent, a penalty aimed at pushing banks to lend the excess cash.
The bank has also set up long-term offers of credit to banks at even lower rates if they show they are lending to companies.
Banks are key to the entire eurozone economy because most companies get their operating funds from them rather than borrowing on financial markets as is more the case in the United States.
Speaking after the bank’s 25-member governing council’s meeting, ECB President Christine Lagarde said the eurozone economy was expected to contract by 8.7 percent this year.
She said a rebound of 5.2 percent was expected in 2021 and 3.3 percent in 2022, warning that “the speed and scale of the rebound are highly uncertain”.
Eurozone inflation is set to slump to just 0.3 percent this year, Lagarde said.
Price growth is expected to climb to 0.8 percent in 2021 and 1.3 percent in 2022, inching closer to the bank’s goal of reaching an inflation target of just below 2.0 percent.
Thursday’s projections are well below those unveiled in March, when the ECB predicted inflation of 1.1, 1.4 and 1.6 percent for 2020-2022.
“Over the medium term, weaker demand will put downward pressure on inflation,” Lagarde said.