ECB decides package of measures: Corona crisis instruments significantly extended – Nord LB column

The European Central Bank today loosened its monetary policy further and decided on a broad set of measures that by and large met expectations. This applies in particular to the parameters of the bond purchase program Pandemic Emergency Purchase Program (PEPP). The ECB increased the purchase volume by a further EUR 500 billion to EUR 1,850 billion. At the same time, the minimum term of the PEPP was extended by a further nine months until the end of March 2022.

This time extension is certainly a compromise between the previously discussed variants of an extension of six to twelve months. However, this also enables the Governing Council to discuss any further explicit extension in late summer on the basis of the progress made so far in the upcoming vaccination campaigns. A further extension has therefore not been agreed, which is also indicated by the ECB’s note that the total volume does not necessarily have to be exhausted. However, the Council explicitly keeps the possibility of further expansion open.

The redemption amounts when the securities acquired under the PEPP fall due are also to be reinvested at least until the end of 2023, and even after that, the portfolio development is to avoid any impairment of the targeted monetary policy course. Ultimately, the ECB only confirms what is now expected by many analysts. Even long after the end of the pandemic, the PEPP portfolio will not be significantly reduced, but will remain on the central bank’s balance sheet as a consequence of the crisis.

To improve the financing conditions, especially after the mixed signals from the Bank Lending Survey, the ECB has also adjusted the parameters of the TLTROs, as expected. In particular, the new launch of three TLTRO deals from June to December 2021 and the extension of the extraordinarily favorable terms by a further twelve months are intended to increase the incentives for adequate lending. The maximum amount was also slightly adjusted upwards.

The package of measures resolved today is supplemented by an extension of the looser collateral requirements, four new PELTROs and an extension of swap and repo lines with other central banks. Changes for the APP were not decided at today’s meeting and the key interest rates remained unchanged. The main refinancing rate will therefore remain at 0.00% and the rate of the deposit facility at -0.50%. The recent appreciation of the euro had spurred speculation about a possible rate cut. The offensive addressing of the effect of the exchange rate on inflation developments in the statement proves that this instrument is not completely off the table for 2021. This reinforces the easing bias for key interest rates already formulated in the forward guidance. However, the ECB should only use this instrument in an emergency.

The ECB’s crisis measures will remain active for much longer, which seems appropriate in view of the stresses caused by the second wave of infections. The growth and inflation projections published today have been adjusted accordingly. However, today’s resolutions hardly represent an acceleration of the expansionary course. The ECB remains true to itself and does what is necessary to overcome the crisis. However, the resolutions do not represent an expansive fireworks display.

Conclusion: As expected, the ECB decided on a new set of measures at its meeting today. With the expansion of the PEPP in terms of time and volume, the recalibration of the TLTROs and other supplementary measures, the tried and tested crisis measures will be significantly extended. In doing so, it is countering the negative effects on macroeconomic development as a result of the second wave of infections. The ECB is resisting the crisis and is signaling that this will not change during the pandemic. However, the monetary authorities apparently do not consider an acceleration of the expansionary course to be necessary either. The market reactions were accordingly limited.

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