The European Central Bank on Thursday said that it would increase the size of its crisis bond-buying programme by €600bn (£504bn, $666bn), significantly expanding its firepower in response to the coronavirus pandemic.
The bank, which chose to leave interest rates unchanged, also said that it would expand the timeframe during which purchases can be made under the programme to the end of June 2021.
The €600bn increase takes the total size of the ECB’s pandemic emergency purchase programme (PEPP) to €1.35tn, meaning that the bank will be able to buy up most of the debt that will be issued by eurozone governments this year to fund their crisis stimulus measures.
“Incoming information confirms that the euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it,” Christine Lagarde, the bank’s president, said on Thursday.
“Severe job and income losses and exceptionally elevated uncertainty about the economic outlook have led to a significant fall in consumer spending and investment,” she said.
While noting that some economic data had suggested that the crisis was “bottoming out,” Lagarde said the improvement seen thus far was “tepid.”
The bank lowered its 2022 inflation forecast from 1.5% to 1.3%, suggesting that it does not expect its stimulus measures to push inflation towards its “below, but close to,” 2% target.
In a statement, the bank said it would conduct asset purchases under the PEPP programme “until it judges that the coronavirus crisis phase is over.”
The expansion of the programme was likely driven by the lowering of the ECB’s inflation expectations, but also because the bank has seemingly “taken a conscious decision to get itself ahead of market expectations,” said George Buckley, an economist at Nomura.
The crisis bond-buying programme comes in addition to the ECB’s existing asset-purchasing programme, which sees it buy around €20bn in eurozone bonds each month.
The bank said on Thursday that it would run the programme “as long as necessary” to reinforce other aspects of its monetary policy.
In early March, the bank expanded that programme to allow it to make €120bn in additional purchases by the end of 2020.
Less than a week later, amid market anxiety about the bank’s relatively meagre response to the crisis, the bank introduced the €750bn PEPP programme following an emergency meeting of its governing council.
In April, the bank lowered interest rates on a facility that provides cheap loans to eurozone banks and introduced a new facility that it said would provide an effective liquidity backstop to the bloc.
The bank — unlike the Bank of England or US Federal Reserve — is legally prohibited from directly financing the deficits of eurozone governments.
But, as part of its response to the crisis, it has chosen to relax or even abandon several self-imposed constraints on asset purchases, such as a limit on the proportion of bonds it can buy from a particular eurozone country.
Germany, the eurozone’s largest economy, late on Wednesday (3 June) approved a larger-than-expected €130bn fiscal stimulus package, meaning that the bloc’s governments have now unveiled upwards of €1.6tn in crisis response measures.
The ECB has warned that the eurozone’s economy could shrink by as much as 12% this year due to the effects of pandemic, and has called on governments to expand the scope of their fiscal spending.
Largarde said that the ECB’s baseline estimate was that the bloc’s economy would contract by 8.7% this year.
The European Commission last week unveiled a €750bn coronavirus recovery plan, proposing a package that would see it borrow hundreds of billions on bond markets.
If the plan is approved by EU member states, it would mark the first time that the bloc’s 27 countries have signed up to issuing common debt on any sort of scale.