Bold ECB Increases Asset Purchases by 830 Trillion Won... Accelerating Economic Stimulus Measures

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] "The European Central Bank (ECB) is shifting its policy to the level of the U.S. Federal Reserve (Fed) to prevent a sharp economic recession." (Wall Street Journal (WSJ))

The ECB is accelerating its policy pace to mitigate the economic impact caused by the novel coronavirus disease (COVID-19). On the 4th (local time), the ECB decided at its monetary policy meeting to expand the size of the Pandemic Emergency Purchase Programme (PEPP) from 750 billion euros (approximately 1,034 trillion won) to 1.35 trillion euros, thereby supplying cash liquidity. Although the expansion of the PEPP size was expected, the scale exceeded market forecasts (500 billion euros). This is interpreted as the ECB demonstrating a strong willingness to stimulate the economy. The ECB also extended the PEPP deadline from the end of this year to at least June next year.

The WSJ stated, "This move alleviates pressure on governments cornered within Europe and clearly shows changes within Europe," adding, "European policymakers, who initially lagged behind the U.S. in the quantitative aspects of policies thrown at the COVID-19 crisis, are now rolling out bold stimulus measures this week."

The ECB’s proactive approach is due to the still bleak outlook for the Eurozone’s economic recovery. ECB President Christine Lagarde forecasted that the Eurozone economy would contract by 8.7% this year, with inflation expected to remain at 0.3% for the year. She said, "There are some signs of bottoming out, but the improvement is lukewarm compared to the speed of the economic indicators’ plunge," adding, "The Eurozone economy is experiencing an unprecedented contraction. We are ready to do everything to overcome the COVID-19 crisis."

This decision has been evaluated as President Lagarde, who took office last November, firing the full-scale COVID-19 response 'bazooka.' The WSJ editorial noted, "President Lagarde is quickly getting up to speed. She understands that her role is to send a message to the market, which is never fully satisfied, that nothing is impossible, and she proved this with the announcement of the PEPP expansion."

In particular, the market paid attention to President Lagarde mentioning inflation as the reason for expanding the PEPP size during the press conference. Regarding the extension of the PEPP deadline, Lagarde explained, "Prices will start to rise again. We will be able to better assess the situation at that point (the extended deadline)." MarketWatch cited Pantheon Macroeconomics’ Chief Eurozone Economist Klaus Wistensen’s analysis that "this asset purchase is not a short-term response to prevent financial market turmoil caused by COVID-19 but a policy measure introduced to raise Eurozone inflation."

The market positively evaluated the ECB’s policy. The euro exchange rate, which has shown recent strength, continued to rise. On that day, the euro exchange rate was $1.1338 per euro, up 0.93% from the previous day, marking the highest level in 12 weeks. The spread between the 10-year government bond yields of Italy and Germany, which indicates Eurozone economic risk, had widened to 2.8% in March but narrowed to below 1.75% on that day.

However, since stimulating the Eurozone economy is not easy, the market has already begun to speculate that the ECB may add another 500 billion euros in asset purchases in September.

Prior to the ECB, Germany, Europe’s largest economic power, announced a 130 billion euro stimulus package. From July to December, the value-added tax rate will be reduced from 19% to 16%, subsidies for electric vehicle purchases will be expanded, and families with children will receive a one-time payment of 300 euros per child. One foreign media outlet evaluated that German Chancellor Angela Merkel is playing a key role at the forefront of Europe’s economic recovery, proposing a 500 billion euro COVID-19 recovery fund with French President Emmanuel Macron.