Already pumping big cash, ECB demurs on dramatic moves

Frankfurt

THE European Central Bank (ECB) kept much of its remaining powder dry on Thursday, reaffirming its already vast bond purchase scheme but holding back on any big policy move as it is already hoovering up debt at a record pace.

Just weeks after unveiling its biggest stimulus scheme to date, the ECB said it would buy 1.1 trillion euros (S$1.7 trillion) of debt this year and kept the door open to even more as the eurozone economy is shrinking faster than already depressed expectations.

"We continue to expect monthly net asset purchases to run for as long as necessary to reinforce the accommodative impact of our policy rates and to end shortly before we start raising the key ECB interest rates," ECB president Christine Lagarde said at a press conference after the bank's policy meeting.

She said the euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime. Measures to contain the spread of Covid-19, have largely halted economic activity in all the countries of the euro area and across the globe,she added.

Ms Lagarde promised continued support for households and firms in the face of the current economic disruption and heightened uncertainty in order to safeguard medium-term price stability.

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She also called for joint policy action and "continued and ambitious efforts to guard against downside risks and to underpin the recovery".

She warned that growth scenarios produced by ECB staff suggest that euro area GDP could fall by between 5 per cent and 12 per cent this year, depending crucially on the duration of the containment measures and the success of policies to mitigate the economic consequences for businesses and workers.

Earlier, the ECB in a statement said it would lower interest rates on its long-term loan for banks to as little as minus one per cent and launch a new loan scheme called Pandemic Emergency Longer-Term Refinancing Operations or Peltros.

But it did not change its asset purchase programmes, including its new Pandemic Emergency Purchase Programme, also known as Pepp.

"The Governing Council is fully prepared to increase the size of the Pepp and adjust its composition, by as much as necessary and for as long as needed," the ECB said.

"In any case, it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry."

With much of Europe locked down indefinitely to contain the novel coronavirus pandemic, the 19-country currency bloc's economy could shrink by 10 per cent this year. Governments are borrowing record amounts to keep firms afloat until restrictions are lifted.

The ECB is unlikely to stay on the sidelines for long as it is on track to exhaust its current bond purchase quota by autumn and jittery financial markets are demanding a further show of commitment.

But having acted early, the ECB can afford to wait now and keep some pressure on Europe's political leaders, who have so far fumbled a fiscal response, leaving the ECB in a familiar role as the currency union's chief crisis fighter.

By the ECB's next regular meeting on June 4, the outlines of a broadly agreed deal on a one-trillion-euro reconstruction fund should also be clearer, making it easier for the central bank to do its part.

Weak data suggest the ECB cannot avoid doing more: figures earlier on Thursday showed the eurozone economy shrank by 3.8 per cent in the first quarter, underperforming expectations for a 3.5 per cent drop, even before the biggest impact of the lockdown was felt.

Inflation, meanwhile, slowed to just 0.4 per cent, far from the ECB's target of almost 2 per cent, and a drop into negative territory is likely in the coming months after oil prices crashed.

With Thursday's decision, the ECB's benchmark deposit rate remains at minus 0.5 per cent and its main refinancing rate at zero per cent. REUTERS