ECB Expands Stimulus Program to Prop Up Pandemic-Hit Economy
The European Central Bank scaled up its emergency bond-buying program by more than a third and unveiled a new batch of ultracheap loans for banks, a bold move aimed at backstopping the region’s governments and businesses as they navigate a stubborn resurgence of the Covid-19 pandemic.
The move, which takes the ECB’s monetary stimulus this year above 3 trillion euros, equivalent to $3.6 trillion, underscores the rocky path ahead for the 19-nation eurozone economy. Europe has been hit much harder than the U.S. and other advanced economies as strict lockdowns have repeatedly closed businesses and hurt the south’s large tourism industry.
Together with a new €750 billion joint fund that European Union leaders are expected to finalize this week, the decision underscores Europe’s willingness to combat this year’s economic downturn using new debt. That marks a shift in strategy from the region’s debt crisis a decade ago, when many governments sought to quickly tighten their purse strings.
Markets were muted following the ECB’s decision, though yields on Italian government debt, the riskiest among the area’s major economies, hovered near multiyear lows, indicating that investors were comfortable with the bank’s efforts to keep the financial system flush with cash.
They will now turn to ECB President Christine Lagarde’s news conference, starting at 8:30 a.m. ET, where she will explain the reasoning behind the decision and unveil fresh forecasts for economic growth and inflation.
As part of a range of new measures, the ECB said it would boost its emergency bond-buying program, unveiled in March, by €500 billion to €1.85 trillion, and extend the expected time horizon of its purchases by nine months, through March 2022. The bank also rolled out new cheap loans for banks and sweetened the terms of its existing loans. It left its key interest rate unchanged at minus 0.5%.
While the rollout of a vaccine in some parts of the world in recent days suggests social restrictions could be eliminated during the course of next year, policy makers worry that the economic recovery is likely to remain bumpy at least until widespread immunity has been achieved.
Japan this week announced a new roughly $700 billion economic stimulus package aimed at speeding up the recovery from the country’s deep, virus-driven slump. In the U.S., an approximately $900 billion coronavirus aid plan is being debated in Congress.
Federal Reserve officials are expected at their Dec. 15-16 meeting to issue new guidance about how long they expect to continue their asset-purchase program, under which the Fed is currently buying $120 billion a month in Treasurys and mortgage-backed securities. Fed officials have signaled recently that they don’t think they need to change the asset-buying program now to deliver more economic stimulus.
In Europe, recent economic data and surveys suggest that the region’s economy is likely to slump back into contraction in the last three months of the year after recording its fastest-ever quarterly growth over the summer.
The U.K.’s statistics agency Thursday said economic growth slowed in October as new infections rose and restrictions were tightened. The economy expanded 0.4% from the previous month, having grown 1.1% in September.
With infection rates still high, governments in Germany, France and other countries have signaled in recent days that they will tighten or extend restrictions in the weeks ahead. Policy makers worry that consumers could grow more cautious about spending amid rising virus cases and hospitalizations.
Adding to policy makers’ concerns: The euro has staged a recent rally against the dollar, reaching a two-year high of $1.21 and hurting the competitiveness of Europe’s large exporters in crucial overseas markets such as the U.S.
The ECB’s fresh stimulus means it will continue to absorb roughly three-quarters of the debt issued by eurozone countries next year, according to estimates from Pictet Wealth Management in Geneva. That supports governments as they spend freely on job-furlough schemes and other costly programs aimed at keeping businesses and jobs alive.