As announced in October (see EUROPE 12592/3), on Thursday 10 December the European Central Bank (ECB) recalibrated several monetary policy instruments, for example by increasing by €500 billion the intervention capacity of the PEPP operation for the massive repurchase of mainly public assets and extending it until the end of March 2022. The objective: to maintain favourable financing conditions during the Covid-19 pandemic until the economy of the euro area stabilises with the immunisation of the population.
“Our compass heading” is “preserving favourable financing conditions over the pandemic period”, said ECB President Christine Lagarde after the Governing Council meeting.
In addition to maintaining its key interest rates at the current level, the ECB reinforced the PEPP operation (see EUROPE 12499/1) for a second time by increasing its allocation to “€1,850 billion” and extending it by 9 months, i.e. until “end of March 2022”.
The use of this instrument, which was set up in March at the start of the pandemic, will continue to be flexible. Its envelope may not be fully mobilised if funding conditions improve, but, conversely, it could be increased if funding conditions deteriorate further. The amounts of the securities acquired through the PEPP operation that reach maturity will be reinvested until at least the end of 2023.
“We're facing circumstances that are, in the short term, more difficult and those difficulties have been caused by the second wave and the containment measures taken”, Lagarde said. “We've good reasons to believe that, by the end of 2021, with the uncertainty associated with it, we'll have reached sufficient heard immunity to hope that the economy will begin to function normally”, she added regarding the extension of the PEPP operation. And she underlined the particular difficulties faced by the “services” sector.
More information on the strengthening of the PEPP operation: https://bit.ly/3a0lbxM
The ECB has also recalibrated the conditions for participation and eligibility for banks in TLTRO III operations, which allow financial institutions to refinance themselves on a long-term basis at rates that can be negative (as far as -1%). To participate in these operations, which will run until June 2022, banks will have to meet new targets for lending to the economy.
“Nobody should assume that rate available under any conditions”, Lagarde stressed, saying that only banks that “maintain or increase their lending levels” will be able to benefit from it.
In addition, the Governing Council extended until June 2022 the measures easing the collateral requirements for the provision of liquidity to banks (see EUROPE 12464/28 and 12473/17). It also decided to offer four additional pandemic emergency longer-term refinancing operations (PELTROs) in 2021. As for the repurchasing of assets under the APP operation, they will continue at a rate of €20 billion per month until the ECB starts to raise its key interest rates. Finally, the current temporary agreements concluded with other central banks, primarily swap and repo lines, are extended until March 2022.
More information on the measures taken by the ECB: https://bit.ly/2W0NxQ5
All these measures were taken on the basis of new economic forecasts prepared by the Frankfurt Institute, for whom the downside risks to the euro area economy continue to predominate, albeit “less pronounced”, thanks to the prospect of the widespread introduction of vaccines.
The ECB is now forecasting that the euro area will experience a recession of 7.3% of GDP in 2020 before the economy bounces back to 3.9% of GDP in 2021 and 4.2% in 2022 before stabilising at 2.1% in 2023.
As regards inflation, the monetary institute is of the opinion that it will remain negative until the beginning of 2021 after reaching -0.3% in November, before gradually rising again. It forecasts that the annual price increase will reach 0.2% in 2020, 1.0% in 2021 and 1.1% in 2022. (Original version in French by Mathieu Bion)