ECB adopts third pandemic stimulus amid risks of double-dip recession 

President of the European Central Bank Christine Lagarde holds a press conference during the Informal Meeting of European Union (EU) Ministers for Economic and Financial Affairs at the InterContinental Hotel Berlin, in Berlin, Germany, 11 September 2020. [EPA-EFE/HAYOUNG JEON]

The European Central Bank increased on Thursday (10 December) its monetary stimulus by €500 billion against the fallout of the pandemic measures as the risk of a double-dip recession in the euro area lingers and the uncertainty surrounding the recovery remains.

Making good on its promise to keep supporting the economy during the pandemic, the ECB expanded its Pandemic Emergency Purchase Programme (PEPPS) and agreed to provide banks with even more ultra-cheap liquidity as long as they keep passing the cash onto companies.

The ECB increased the overall size of PEPPS by €500 billion to €1.85 trillion, in line with market expectations. It is the third stimulus since the Frankfurt-based institution launched its pandemic programme last March.

Lagarde vows to act 'with determination' against second wave

European Central Bank President Christine Lagarde said on Thursday (19 November) that the institution will act “with determination” against the second wave of the pandemic, ahead of the new monetary stimulus she is expected to announce in December.

It also extended the PEPPS by nine months to March 2022, with the aim of keeping government and corporate borrowing costs at record lows.

ECB President Christine Lagarde said consumers remained nervous and business investment vulnerable to further ebbs in confidence, making any recovery patchy and uneven at best.

“Incoming data and our 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,” she told a news conference.

“The resurgence in COVID-19 cases and the associated containment measures are significantly restricting euro area economic activity, which is expected to have contracted in the fourth quarter of 2020,” she added.

The bank released new projections putting euro area growth next year at 3.9% compared to an earlier forecast of 5.5%, but accelerating to 4.2% in 2022 from a previous estimate of 3.2%.

After ticking along at 1.0% next year, inflation was now seen barely rising to 1.1% in 2022, down from an earlier forecast of 1.3%.

Lagarde expressed the hope that, by the end of 2021, mass coronavirus vaccination will have created sufficient immunity for the region’s huge services sector to get back to some level of normality, but added a note of caution.

European recovery slows downs amid high uncertainty

The European Commission revised downwards its expectations about the European recovery as the impact of the second wave of COVID-19, and the uncertainty about how it will evolve further, will weigh on the fragile economies.

“Uncertainty remains high,” she said. “We continue to stand ready to adjust all our instruments as appropriate.”

In addition, it will reinvest for one year more, until the end of 2023, the cash released from bonds maturing under PEPPS, keeping a sizeable volume of support to the sovereign bond market over the next three years.

Aiming to give banks ample liquidity, the ECB will also hold three additional tenders for three-year cheap loans to support the real economy. In addition, the loose collateral requirements for banks introduced in the spring were also extended until June 2022, further facilitating the credit flow.

Risks

The stimulus expansion comes as the 19-country eurozone struggles to balance a growing range of short-term risks against improving long term prospects.

The immediate future carries the prospect of a triple shock — a lingering second wave of the pandemic, a hard Brexit and a delay in the European Union’s 750 billion euro ($908 billion) recovery fund, due to be discussed at an EU summit on Thursday.

But all three are seen as temporary shocks, with the political strife likely to be resolved and the pandemic easing by the spring, leaving the ECB with the task of getting the bloc through a difficult winter.

EU leaders to decide on compromise to unblock EU budget package

EU leaders will discuss on Thursday (10 December) whether to approve the compromise negotiated by the German presidency to drop Hungary and Poland’s vetoes to the EU budget deal, postponing of the Rule of Law mechanism until EU judges validate it.

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