Christine Lagarde, president of the European Primary Bank (ECB), speaks during a live stream video of the central bank’s virtual rate decision news talk.
Bloomberg | Bloomberg | Getty Images
LONDON — More bond purchases, lower costs for banks and even mutates to interest rates — the European Central Bank could go all in at its December meeting, as the euro area grapples with a supporter wave of the coronavirus.
The central bank hinted on Thursday that it would consider implementing more monetary stimulus in December. The pronouncement followed decisions in France and Germany to impose new national lockdowns — draconian measures that led to major economic contractions earlier this year and menace further economic pain.
“ECB President Christine Lagarde sent a crystal-clear message that: further stimulus require be announced in December, and there will be a package of measures,” Marco Valli, head of macro research at UniCredit, implied in a note.
In the wake of the pandemic, the ECB launched a new government bond purchase program in an effort to bolster the region’s economy in the semblance of the coronavirus pandemic. Its Pandemic Emergency Purchase Programme, or PEPP, is due to last at least until June of 2021 and totals 1.35 trillion euros ($1.51 trillion).
At least four analysts believe this program to be extended in duration and size at the December meeting — and they think the ECB will go even what is more.
“A boost and extension of the PEPP is now a done deal, and we also see a high likelihood that the current favorable terms of TLTRO (aimed longer-term refinancing operations) … will be extended,” Valli said, in reference to the borrowing conditions offered to banks.
Lop off borrowing costs for banks
Earlier this year, the ECB decided to make lending more attractive for commercial banks as a way to shove the real economy. The idea is that banks are encouraged to provide loans to small businesses, for instance, with the latter then undoubtedly to reinvest that money, expand and hire more people.
As part of the ECB’s scheme, the more loans commercial banks arise to households and non-financial firms, the more attractive the interest rate will be when they borrow from the important bank.
Florian Hense, economist at Berenberg, also suggested that “the ECB could lengthen the period during which it presentations currently the lowest lending rate of -1%” as part of its December package.
In addition, the ECB could also allow banks to re-price persisting loans to the lowest lending rate of -1%, rather than offering the most favourable rate only for new make a loan of, Hense added.
More government bonds
Prior to the Covid-19 outbreak, the ECB was already trying to boost the euro zone husbandry with regular government bond purchases. The Public Sector Purchase Program (PSPP) continues as another contraption to prop up the region’s economy, made up of 19-member states.
More radical, and earlier, action is also possible.
Andrew Kenningham
chief Europe economist at Assets Economics
Some analysts are now expecting this bond purchase program to also be extended, in addition to PEPP.
Claus Vistesen, economist at Pantheon Macro, point of viewed a 150 billion euro increase to this scheme, which “likely will be added over 12 months under the aegis end-2021.”
And a rate cut?
The ECB has been on a path of low interest rates since the sovereign debt crisis, having announced its from the word go more into negative territory in 2014. Negative rates are also a monetary policy tool, which aim to subsidize bank lending and prop up the real economy.
“Interest rate policy is probably the trickiest part of the package,” Valli from UniCredit put about.
“Entering today’s meeting, we thought that a cut of the deposit rate would not be on the ECB’s agenda for some time … We have not silvered our view for now, but Ms. Lagarde’s words today do increase risks to our forecast,” he said in a note on Thursday.
The ECB’s main refinancing proceedings, marginal lending facility and deposit facility remain at 0%, 0.25% and -0.5%, respectively.
Hense from Berenberg also whispered that “a cut in the deposit rate below the current -0.5% seems less likely.”
But given how severe the economic job is, the ECB could even act sooner.
“More radical, and earlier, action is also possible,” Andrew Kenningham, chief Europe economist at Outstanding Economics, said in a note.