ECB gives euro zone another shot in the arm to fight pandemic

[FRANKFURT] The European Central Bank rolled out yet more stimulus measures on Thursday to lift the currency bloc out of a double-dip recession and provide support to the economy while its 350 million people wait for coronavirus vaccines to be deployed.

ECB President Christine Lagarde expects GDP to expand by 3.9 per cent next year, slower than its September forecast of 5 per cent. But in 2022, growth is seen at 4.2 per cent, above a previous projection of 3.2 per cent.

She said the ECB also sees inflation next year at 1 per cent, unchanged from its last projection, while in 2022, inflation is seen at 1.1 per cent against 1.3 per cent seen three months ago. In the bank's initial projection for 2023, inflation is expected to rise to 1.4 per cent, still well short of the ECB's target of almost 2 per cent.

Ms Lagarde said risks to the euro zone economy remained tilted to the downside but had become less pronounced.

With many businesses shuttered, unemployment surging and debt hitting record highs, central bank cash has thrown governments and firms a lifeline this year but much of 2021 will pass before significant relief is likely.

Making good on its promise to keep supporting the economy during the pandemic, the ECB expanded its debt purchase scheme and agreed to provide banks with even more ultra-cheap liquidity as long as they keep passing the cash onto companies.

"Uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs," the ECB said in an earlier statement. "The Governing Council therefore continues to stand ready to adjust all of its instruments, as appropriate" The ECB increased the overall size of its Pandemic Emergency Purchase Programme by 500 billion euros (S$810.5 billion) to 1.85 trillion euros, in line with market expectations. It also extended the scheme by 9 months to March 2022, with the aim of keeping government and corporate borrowing costs at record lows.

Reinvestments of cash maturing from the emergency bond purchase scheme were extended by one year until the end of 2023.

The ECB also extended the period during which banks will get a 1 per cent interest rate from the central bank for borrowing at its long-term cash auctions by one year to June 2022.

Aiming to give banks ample liquidity, the ECB will also hold three additional tenders for three-year loans with the last one now scheduled for December 2021, it added.

In further help to banks, exceptionally easy collateral requirements that were introduced in the spring were also extended until June 2022.

The stimulus expansion comes as the 19-country euro zone struggles to balance a growing range of short-term risks against improving long term prospects.

The immediate future carries the prospect of a triple shock - a lingering second wave of the pandemic, a hard Brexit and a delay in the European Union's 750 billion euro recovery fund, due to be discussed at an EU summit on Thursday.

But all three are seen as temporary shocks, with the political strife likely to be resolved and the pandemic easing by the spring, leaving the ECB with the task of getting the bloc through a difficult winter.

Fresh ECB staff economic projections are also expected to show weaker growth in 2021 due to the second wave of the coronavirus, but better prospects in 2022, leaving the overall growth path little changed.

The new measures, similar in vein to past stimulus, are unlikely to push borrowing costs much lower as the ECB has argued that its job was to keep borrowing costs around record lows for longer, rather than to reduce them further.

But anaemic inflation will more than justify the idea of low for longer and fresh ECB projections are expected to show price growth well below the bank's near 2 per cent target even in 2023, which would be the 11th straight year of undershooting its objective.

REUTERS,BLOOMBERG