ECB ready to increase its coronavirus stimulus

European Central Bank (ECB) President Christine Lagarde speaks during a press conference following the meeting of the Governing Council of the European Central Bank in Frankfurt am Main, Germany, 12 March 2020. [EPA-EFE/ARMANDO BABANI]

The ECB is ready to increase its €750 billion bond-buying programme to cope with the fallout of the coronavirus pandemic, as the eurozone economy could fall by 12% this year, its president Christine Lagarde said on Thursday (30 April).

The economic horizon has worsened significantly since the institution announced its Pandemic Emergency Purchase Programme (PEPP) on 18 March.

ECB unveils €750 billion stimulus against coronavirus

The European Central Bank unexpectedly announced just before midnight on Wednesday (18 March) that it would spend €750 billion in bond purchases to calm down sovereign debt markets, in the strongest signal in the euro area to date that it was ready to fight against the economic fallout of the coronavirus.

The ECB expects that the euro area’s GDP could fall by between 5% and 12% this year, depending on the duration of the containment measures.

Against this backdrop, Lagarde said that the Frankfurt-based institution is “fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed.”

Lagarde also announced that the ECB would further incentivise banks’ lending to the real economy to ensure that companies and households have sufficient liquidity during this difficult period.

To that end, the ECB would lend money to banks at rates as low as -1% via an existing credit line and launch a separate round of new lending.

The ECB is already buying high volumes of Italian debt to control tensions in the markets.

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Italy was already one of the most vulnerable eurozone economies before it became the nation hardest-hit by the pandemic in Europe. 

Lagarde has insisted on various occasions that the ECB is ready to be “flexible” with all its bond-buying programmes currently in place, totalling almost €1 trillion.

“The Governing Council remains fully committed to doing everything necessary within its mandate to support all citizens of the euro area through this extremely challenging time,” she said.

The ECB also has at its disposal the unused Outright Monetary Transactions (OMT), created in the aftermath of the euro crisis to shield the single currency. OMT allows the ECB to purchase potentially unlimited amounts of euro area sovereign bonds.

But Lagarde insisted that the OMT was an instrument “for different times”, and a different situation, as it aimed at stabilising one single country, Greece, during the eurozone crisis.

As the euro area as a whole is currently affected by a systemic shock, she stressed that “the best tool” is the new pandemic instrument, and insisted that its €750 billion firepower could be increased and extended beyond the end of 2020.

Together with the monetary stimulus, Lagarde told EU leaders that “an ambitious and coordinated fiscal stance is critical, in view of the sharp contraction in the euro area economy.”

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She urged member states to adopt “further strong and timely efforts” to get out the deepest downturn since World War II, on top of the liquidity instruments already adopted. She hoped that EU leaders would reach a joint approach and “show solidarity”.

Lagarde spoke to reporters in an unusual press conference, without journalists in the room  and ECB vice-president, Luis de Guindos, following the event remotely. As a precautionary measure, the institution split into two teams to ensure business continuity during the pandemic.

Lagarde said that the return to the “new normal” is “certainly not in the next few months, we are looking at way down, and probably at 2021”.

She insisted that the two imperatives in the months ahead would be that staff are kept safe and the institution honours its mandate of price stability.

[Edited by Benjamin Fox]

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