As expected, the European Central Bank (ECB) on Friday boosted its emergency asset purchase program to stem the economic damage from the COVID-19 pandemic. It did so, however, by the far larger amount of $676 billion (€600 billion) to bring the total coronavirus stimulus package for the European Union (EU) to $1.53 trillion (€1.35 trillion).
ECB launched its Pandemic Emergency Purchase Program (PEPP) in March to "counter the serious risks" posed to the EU by the COVID-19 pandemic. PEPP will see the ECB buy $819 billion (€750 billion) in eurozone government bonds this year. On Friday, the ECB also extended the time frame of purchases under PEPP, which will now last until June 30, 2021.
PEPP was originally set to last until Dec. 31, 2020. Prior to PEPP, the ECB's monthly asset purchases stood at $22.6 billion (€20 billion). The Governing Council, the main decision-making body of the ECB, said it will conduct net asset purchases under PEPP until it judges the COVID-19 pandemic is over.
ECB president Christine Lagarde said the PEPP expansion will further ease the bank's general monetary policy stance. The expansion will also support funding conditions in the real economy, especially for businesses and households. The ECB also kept interest rates unchanged.
Lagarde said purchases will continue to be conducted in a flexible manner "over time, over asset classes and among jurisdictions. This allows us to effectively stave off risks to the smooth transition of monetary policy."
Lagarde said the Governing Council increased the size and duration of PEPP because of two main factors. The first was a revision of the ECB's inflation outlook. The medium-term projection until 2022 has been lowered to 1.3% from 1.6% in March.
The second factor is that financial conditions for the eurozone and its 19 Member States are significantly tighter today. This tightness can be seen in average sovereign yields and broader metrics of financial tightness. These troublesome signs are manifest at a time where the eurozone needs easier conditions to achieve price stability.
Lagarde said the ECB judged it necessary to increase the size of PEPP because of these twin factors. She added the decision by the Governing Council that "action had to be taken" was unanimous.
Extending and ramping-up its asset purchases by $676 billion means ECB can continue running quantitative easing into 2021 at over $113 billion (€100 billion) per month, said Neil Williams, senior economic adviser to investment management firm, Federated Hermes Inc., based in Pennsylvania. Williams said the new monthly purchase rate is a lot higher compared to the $26 billion run-rate pre-virus, and even the $90 billion during the 2015 euro crisis.
David Zahn, head of European fixed income at Franklin Templeton, said the size of the PEPP expansion caught markets by surprise. He noted markets were widely expecting the ECB to increase the program by anywhere from €250 billion to €500 billion. The increase to €600 billion ensures the ECB remains on the front foot as it looks ahead to 2021.
