ECB Expands Bond Buying Program By Another $675 Billion, Lagarde Defends Stimulus Measures

The European Central Bank, or ECB, has expanded its bond buying program by another €600 billion ($675 billion). The pandemic emergency purchase program, or PEPP, is now worth a total of €1.35 trillion ($1.52 trillion).

Most analysts were expecting an expansion of €500 billion ($562 billion).

The ECB said the duration of such purchases will be extended from the end of 2020 through at least the end of June 2021, or until the “coronavirus crisis phase” is over. Purchases will continue at a monthly rate of €20 billion ($22.5 billion), plus an additional €120 billion ($135 billion) spread out until the end of the year.

The stock of assets purchased will not shrink until at least the end of 2022.

The balance sheet of assets bought will not contract until the central bank begins to hike interest rates – which suggests the stimulus measures will exist until there is an adequate recovery.

The central bank also kept its key interest rates unchanged at record lows. The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will remain at zero, 0.25% and minus-0.50%, respectively.

“In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households,” the ECB’s governing council stated. “The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the governing council to effectively stave off risks to the smooth transmission of monetary policy.”

The emergency bond buying program has helped to keep a lid on longer term borrowing costs for countries in the euro zone. This has particularly offered relief to heavily indebted nations like Italy.

Rachel Winter, associate investment director at investment firm Killik & Co. of London , said the expanded bond buying "is likely to push European government bond yields even further into negative territory, and investors in search of positive returns will be forced to take more risk."

Winter also wondered how much money the ECB can keep printing before money loses its underlying value.

"Although inflation is currently very low, these levels of asset purchases are causing some concern about inflation further down the line," she said. "Economic theory tells us that… inflation is linked to the supply of money in the economy, and if the money supply is being drastically increased to fund quantitative easing then long-term inflation ought to rise too. These fears of long-term inflation have stoked demand for gold recently."

Frederik Ducrozet, senior economist at Pictet, suggested that the ECB may have to slow down its asset purchases. “At the current pace of PEPP purchases (€6 billion per day, or €30 billion per week), the new [€1.35 trillion] envelope would be exhausted by [Feb. 2021],” he tweeted. “To last until [June 2021], the ECB needs to slow purchases to €4 billion per day. More likely, the ECB can expand PEPP by another €500 billion later this year.”

The ECB likely reacted to a slew of grim economic data across the continent, including an increase in the April unemployment rate in the euro zone to 7.3%, as well as the German economy sinking into recession.

Although manufacturing and services activity has picked up recently as some countries have reopened businesses, analysts are worried about how the European economy will fare in the second quarter. The ECB earlier warned the euro zone economy could shrink by up to 15% in the quarter.

The ECB further said it expects to keep its key interest rates “at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

In a press conference, ECB President Christine Lagarde addressed the matter of the German constitutional court’s ruling against its asset purchase program.

“We have indeed taken note of the judgement... and we are confident that a good solution will be found,” she said, adding that she expects “a good solution that will not compromise the ECB’s independence,” European law, or the primacy of the European Court of Justice, which has ratified the bond purchase program.

Lagarde reaffirmed that the asset buying program is perfectly legal and enjoys broad support.

Viraj Patel, a global macro strategist at Arkera in London, said he expects the ECB to keep expanding the bond buying program.

“Sounds like the ECB will do more not less easing going forward -- overall monetary easing not done yet,” he tweeted.