ECB to pave way for more stimulus as recession fears grow

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 in Berlin, Germany, 11 September 2020. [EPA-EFE/HAYOUNG JEON]

The European Central Bank is expected to resist pressure to unveil fresh stimulus measures on Thursday (29 October) but it will likely pave the way for action in December as fresh restrictions aimed at containing the coronavirus pandemic fuel fears over a new recession.

Having already lined up unprecedented firepower to prop up the 19-member currency bloc’s economy, the ECB is in no hurry to act, as its ongoing bond buying could keep markets calm well into next year. Policymakers also appear keen to push governments to take the lead.

But economic gloom is quickly spreading as coronavirus infections surge again, and the ECB is facing calls to signal even greater and longer-term support for an economy that has already suffered an unprecedented recession this year.

That puts the onus on ECB President Christine Lagarde to signal the ECB’s commitment to keeping financing conditions super easy without raising market expectations so much that even sizable support in December would be seen as a disappointment.

“Lagarde needs to walk a fine line with openness to do more, without pre-committing,” Danske Bank economist Piet Haines Christiansen said. “I think that risks are skewed to markets being slightly disappointed (on Thursday) rather than dovishly surprised.”

The ECB announces its policy decision at 1245 GMT, followed by Lagarde’s press conference at 1330 GMT.

ECB doubles down on pandemic response after German ruling

The European Central Bank announced on Thursday (4 June) that it will add €600 billion to its €750 billion bond-buying response against the coronavirus, in its first governing council meeting after Germany’s Constitutional Court ruled against the bank’s asset-purchasing programme.

Spreading gloom

The problem is that indicators are showing a rapid deterioration in the outlook, challenging the ECB’s view that the bloc’s economy will grow back to its pre-crisis level by the end of 2022.

Spain, one of the euro zone’s weakest performers, may already be back in recession while momentum in Germany also appears to be running out of steam.

The gloom is only likely to spread in the coming days as the EU’s biggest nations, including Germany and France, debate imposing new lockdown measures.

While new steps could be less severe than in the spring, they could stay in place longer, raising the risk of surging insolvencies and unemployment.

“The economic backdrop warrants more action now,” Florian Hense at Berenberg said. “Over the past few weeks, things have turned to the worse again… economic growth is grinding to a halt in the fourth quarter.”

Inflation expectations, the ECB’s main worry, are also declining. While the threat of deflation is not yet back on the agenda, inflation may not rise back to the ECB’s target of nearly 2% for years to come.

But there are clear limits in the ECB’s powers. Buying roughly €100 billion worth of debt a month, it has already pushed borrowing costs to record lows, and even the spread between the borrowing costs of euro zone members is back to its pre-crisis levels.

Banks, flush with liquidity, already borrow for minus 1% and their biggest fear is deteriorating credit quality, not the availability of cheap funding.

Still, once the ECB has unveiled fresh economic projections after its Dec. 10 meeting, it will likely extend and expand its €1.35 trillion Pandemic Emergency Purchase Programme and improve funding conditions for banks.

It is also expected to keep pressure on governments to ensure budget support and finally agree on a long-delayed, €750 billion recovery package for the bloc.

Coronavirus will trigger the deepest recession in EU history

The economies of EU countries will shrink by 7.4% this year as the coronavirus crisis is set to cause the worst recession in the bloc’s history, according to the European Commission’s spring forecast presented on Wednesday (6 May), which also foresaw a significant rebound in 2021.

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