European Central Bank Expands Stimulus Measures

June 4, 2020

The Governing Council of the European Central Bank left its interest rate structure as is but took further steps towards a more accommodative stance via changes in forward guidance and a big increase of the pandemic emergency purchase program (PEPP), which was raised from EUR 750 billion to EUR 1.35 trillion. The PEPP program will run at least through mid-2021, and the older monthly APP (asset purchase program) at a pace of EUR 20 billion per month will continue through end-2022. The trio of interest rates (a negative 0.5% deposit rate and a 0.25% marginal lending rate flanking a zero percent refinancing rate) was last modified at the September 2019 Governing Council meeting when the deposit rate was cut by 10 basis points. The Governing Council again affirmed that rates will not be raised until officials are confident that inflation is converging robustly on the target of “below but close to 2%.” CPI inflation in May was at only 0.1% and down from 1.2% a year earlier.

This month’s ECB policymakers’ meeting coincided with a quarterly update by staff of forecasts for growth and inflation. Both estimates for 2020 were revised very sharply downward — GDP expansion to negative 8.7% from +0.8% projected at the March review and CPI inflation to 0.3% from 1.1%. Despite upward growth revisions of 3.9 percentage points in 2021 growth to 5.2% and 2022 growth of 1.9 percentage points to 3.3%, the cumulative growth rate over the three-year period ends up 4.3 percentage points less at minus 0.8%. Moreover, officials consider the balance of risk behind this baseline growth trajectory to be tilted to the downside. All this implies a lot of slack in the economy throughout the forecast horizon and results in lower projected CPI inflation for all the years. Inflation was revised to 0.3% from 1.1% for the current year, to 0.8% from 1.4% for 2021, and to 1.3% from 1.6% for 2022. At no point in the time span does inflation reenter the central bank’s medium-term inflation target.

ECB President Lagarde in press conference afterward addressed one controversial aspect of the expansion of asset purchases announced today. Germany’s constitutional court had ruled the central bank’s quantitative asset buying to be in non-compliance with German law, but Lagarde pointed out that the Court of Justice of the European Union has ruled the action to be consistent with its policy authorization and that the latter court, rather than any individual nation’s judicial authority, is the proper venue for deciding matters of what the ECB is allowed to do. Unlike her three predecessors (Duisenberg, Trichet, and Draghi), Lagarde’s professional training was as a lawyer.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



Comments are closed.