ECB unveils bigger than expected increase in crisis bond buying

The decision reflects how Europe is finally coming together with vast spending plans to drag the economy out of its worst recession in living memory

Pic AFP

BRUSSELS • The European Central Bank (ECB) intensified its response to the coronavirus recession with a bigger than anticipated increase to its emergency bond-buying programme.

At a virtual meeting yesterday, president Christine Lagarde and colleagues decided to expand the amount of purchases by €600 billion (RM2.89 trillion) and extended their duration until at least the end of June 2021. The vast majority of economists surveyed by Bloomberg last week expected policymakers to boost buying by €500 billion.

The decision reflects how Europe

is finally coming together with vast spending plans to drag the economy out of its worst recession in living memory. Germany announced a new €130 billion fiscal package late on Wednesday, the latest in a raft of national programmes, and the European Union has proposed a €750 billion joint recovery fund that leaders will discuss later this month.

Lagarde will hold a press conference call at 2:30pm Frankfurt time during which she will also unveil new economic projections.

The ECB’s asset purchases should keep a lid on borrowing costs for governments as they issue debt to finance their support. The central bank said they would be conducted in a “flexible manner over time, across asset classes and among jurisdictions”, with proceeds from maturing bonds reinvested at least until the end of 2022.

It fits into Lagarde’s pledge to spare no efforts to protect the euro and should help dispel concern that policymakers’ scope for action is limited after a German court ruling last month questioned the legality of an older, still-active bond-buying programme.

European countries are slowly emerging from lockdowns that put their economies into a deep freeze for more than two months. Lagarde has already said the recession this year will likely be somewhere between the central bank’s medium and worst-case scenarios, signalling a contraction of around 10%. Inflation in the euro area slowed to just 0.1% in May, adding to the case for more monetary stimulus.

Still, about two-thirds of the €750 billion in pandemic purchases announced in March haven’t been spent. The early top-up suggests the central bank isn’t willing to second-guess how

long bond investors can wait before demanding higher borrowing costs from the region’s most-indebted nations.

The central bank had already sweetened the terms of its liquidity operations in April so that lenders keep extending credit to companies, many of which have seen their revenues eroded by the shutdowns to limit the spread of the virus.

Yesterday’s decision highlights emergency bond purchases as the ECB’s main crisis-fighting tool. In the first weeks of the programme, the central bank skewed purchases toward Italy in a bid to keep borrowing costs in check, using the greater flexibility of the scheme compared to the institution’s regular quantitative-easing plan.

Policymakers have refrained from cutting interest rates further below zero amid opposition to negative rates from banks and some politicians. — Bloomberg