ECB leaves rates unchanged but boosts PEPP by EUR 500BN
- European Central Bank (ECB) President Christine Lagarde announces EUR 500BN increase to Pandemic Emergency Purchase Programme (PEPP).
- Euro to US dollar (EUR/USD) exchange rate continues to outperform despite further policy action to fight the pandemic
- ECB leaves interest rates unchanged at near zero
- Eurozone forecast to reach herd immunity by 2021 due to coronavirus vaccines
The European Central Bank (ECB) announced additional monetary policy measures on Thursday in efforts to boost recovery across the Eurozone, which is facing its first double-dip recession in over a decade.
Although the deployment of COVID-19 vaccines offers a glimmer of hope of recovery, many of the bloc’s businesses remain behind shutters, unemployment rates across the EU are soaring, and the budget deficit is close to 10% in 2020.
While Eurozone gross domestic product (GDP) data for Q3 registered stronger-than-expected results, ECB President Christine Lagarde noted that the pandemic continues to pose a threat to public health and businesses.
President Lagarde added: “We expect the economy will shrink in Q4 of 2020” given that several EU member countries reimposed coronavirus lockdowns in the last few months of the year to stem the spread of the coronavirus.
Yet, while the ECB has escalated its efforts to shield the bloc from further economic fallout, the euro (EUR) edged higher.
Euro jumps higher despite central bank action
At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading 0.9% lower at EUR 1.0962, and the currency pair could decline further ahead of the weekend due to the ongoing Brexit dilemma.
The euro (EUR) is also extending gains against a limping US dollar (USD) heading into the North American trading session. As of 16:30 GMT, the euro to US dollar (EUR/USD) exchange rate is trading near multi-year highs at USD 1.2144.
As a rule of thumb, central bank policy action weakens the national currency of the respective currency as it increases the supply of money.
However, the ECB’s decision to ramp up its Pandemic Emergency Purchase Programme (PEPP) for an extended period of nine months appears to have reduced the euro’s (EUR) exposure to downward momentum.
Foreign exchange (FX) markets seem to be in favour of the central bank’s longer fiscal commitments, with PEPP now expected to run until March-end 2022.
ECB delivers additional stimulus
With approximately 350 million people waiting for Pfizer and BioNTech’s vaccine to be rolled out across the EU, the ECB said they had no choice but to expand monetary policy as “uncertainty remains high.”
Policymakers added EUR 500BN to PEPP, taking its emergency asset programme total to EUR 1.85TN.
The ECB also agreed to provide banks with more long-term loans on cheap terms for another year, on the premise that these banks continue to loan cash to businesses.
However, the ECB’s Governing Council decided to leave interest rates unchanged at 0%, 0.25% and -0.50% respectively, which fell in line with FX market expectations.
Aside from leaving interest rates at near zero, the central bank extended reinvestments of cash maturing from PEPP to year-end 2023.
Banks will now also be able to receive a three-year loan from the European Central Bank, which will be holding three additional tenders, with the last being scheduled for December 2021.
The ECB also extended the recently loosened collateral requirements on banks until the end of the second quarter in 2022.
The COVID-19 stimulus boost is the ECB’s latest attempt to protect the bloc from the pandemic, which is expected to have a more devastating effect on the Eurozone economy than the 2007-08 financial crisis.
Pandemic still poses a threat to Eurozone economic recovery
According to a recent study by the European Trade Union Confederation (ETUC), the recession triggered by the virus has left one in ten European workers at risk of poverty and the situation is expected to deteriorate further in the aftermath of the pandemic.
While COVID-19 vaccines could be the light at the end of the tunnel, with much still uncertain, the Eurozone economy is in fact, facing the prospect of a triple shock. The first being a potential third wave in early 2021 if restrictions are lifted too early, a no-deal Brexit and a crisis across the EU due to threats from Hungary and Poland over vetoing the EUR 1.8TN seven-year budget and coronavirus recovery fund.
It was reported on Wednesday evening that Hungary and Poland had lifted their veto over the EU budget after reaching a compromise with the EU.
While final approval of the deal will need to be agreed on Thursday, the new development is proving euro-positive as the single currency is outperforming all its risk-off rivals and the British pound (GBP).
That being said, the ECB still has the difficult task of getting the Eurozone economy through the winter and early spring.
However, policymakers have expressed a less dovish outlook in the wake of vaccine success and appeared confident that the EU could return to near normality in the second half of 2021.
The ECB linked its policy measures to the expectations of virologists and immunisation experts who have forecast the vaccine to bring herd immunity to the Eurozone by the end of 2021.
While economic projections for the first half of 2021 are relatively downbeat due to the impact the second wave of COVID-19 had on the EU, the ECB forecasts more substantial growth prospects in 2022.
Investors have already begun pricing in post-pandemic recovery, reflected in the rally in global stock markets and the strength of riskier assets such as the Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD).