European Central Bank takes its pandemic bond buying to 1.35 trillion euros to try to prop up economy
- The central bank increased its crisis bond-buying program by 600 billion euros ($672 billion).
- It also extended the scheme's duration until June 2021, or until the bank believes the crisis is over.
- Interest rates were maintained at their current levels, as expected.
- However, the ECB updated its economic projections which came in significantly worse than in March.
The European Central Bank announced Thursday it will increase its Pandemic Emergency Purchase Programme by 600 billion euros ($672 billion) as it attempts to bolster the economy following the coronavirus crisis.
The amount comes on top of 750 billion euros of government bond purchases the ECB announced in March, taking the total to 1.35 trillion euros. The central bank also said Thursday that the duration of the program will be extended from the end of 2020 until June 2021, or until the bank believes the crisis is over.
However, some analysts have raised doubts that the 600 billion euro increase will be enough to cover purchases until June of 2021. In a press conference following the move, ECB President Christine Lagarde said this was deemed to be "the appropriate size" to bring inflation "significantly closer" to its pre-coronavirus path.
The emergency program, announced in March, has helped keep borrowing costs lower for countries in the euro zone — the 19-member region that uses the euro as its common currency.
Thursday's announcement contributed to a further reduction in borrowing costs, with the yield on Italy's 10-year government paper dropping from session highs above 1.56% to 1.40% shortly after the decision. There have been similar moves on Greek, Portuguese and Spanish debt.
The euro see-sawed, initially turning positive on the news to trade about 0.25% higher against the U.S. dollar. It then dropped after disappointing macroeconomic projections, to rebound again moments later.
"The even more aggressive monetary policy stance helps to contain the downside risks," Holger Schmieding, chief economist at Berenberg bank, said in an email. "In addition, the strong signal can bolster the nascent rebound in the confidence of households and companies that the worst will soon be over."
Speaking in the press conference, Lagarde said the euro zone was facing an "unprecedented contraction."
The central bank updated its economic forecasts and said it now expected the euro zone economy to contract by 8.7% this year, before rebounding to 5.2% growth in 2021 and 3.3% in 2022.
The projections are significantly worse than the ECB's own forecasts in March, when it forecast GDP for 2020 at 0.8%, for instance.
The central bank also said headline inflation was expected to be 0.3% in 2020 and 0.8% in 2021 — well below the bank's mandate to drive inflation "close but below 2%".
Lagarde explained that the forecasts were dependent on the duration of the pandemic and the effectiveness of policies taken across the region.
The central bank's emergency package, which also includes measures to boost bank lending, is in addition to steps taken prior to the pandemic to boost low inflation levels in the zone. This includes monthly purchases of 20 billion euros in government bonds as part of a quantitative easing plan announced in 2019.
The ECB also announced on Thursday that it has decided to keep its interest rates unchanged, as expected. The rate on the main refinancing operations, marginal lending facility and deposit facility stand at 0%, 0.25% and -0.50% respectively.
It comes after data revealed the severity of the impact of the coronavirus crisis in Europe. The unemployment rate in the euro zone rose to 7.3% in April, from 7.1% in March, as lockdown restrictions hit jobs.
Business activity in the region has recovered slightly after plunging to record lows earlier this year. Manufacturing and services activity hit a three-month high in May, after some economies began to reopen. However, there are still concerns around the overall economic performance in the second quarter of 2020.
The ECB had previously warned that the euro area economy could contract as much as 15% in its worst-case scenario due to the coronavirus crisis.