ECB extends bond purchases and does not rule out further rate cuts – Commerzbank column

As announced in the last council meeting, the ECB announced another extensive easing package. As a reason for this, ECB boss Lagarde cited that the corona burdens on the economy and inflation are greater than previously expected. The risks to the economy remained on the downside. The ECB is only assuming growth of 3.9% next year, up to now it was 5.0%. In its new projections, the ECB also lowers its inflation projections slightly. At the same time, Lagarde was confident that herd immunity would be achieved through vaccinations by the end of 2021.

By expanding its instruments, the ECB aims to ensure that financing conditions in the euro area remain favorable. As expected, it increased the volume of bond purchases of the Corona aid program “PEPP” by EUR 500 billion to now 1.85 trillion. Euro. The term will be extended by nine months to March 2022. The expired bonds are to be fully reinvested by at least the end of 2023. Since the outbreak of the pandemic, the ECB’s net purchases of government bonds have roughly corresponded to the net bond issues of the euro countries. In other words, the ECB financed virtually the entire budget deficit. She will not increase her monthly purchases, only extend them. Next year, the conditions of the targeted long-term tenders (TLTROs) will also be improved and extended until June 2022. The ECB provides commercial banks with further particularly cheap long-term loans (PELTROs).

The markets reacted coldly to the measures. Bund yields rose slightly, the Dax collapsed in the meantime and the euro appreciated. The euro is being watched very closely by the ECB and wasn’t a big issue yesterday. The ECB is also ready to adjust the instruments if necessary. A rate cut remains a possible option.


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