By Laurie Laird
LONDON (MaceNews) – The European Central Bank expanded its emergency asset purchase program but declined to activate any further measures in what it calls its “policy toolkit,” despite forecasting a fall in inflation to just above zero.
The ECB’s pandemic emergency purchase program, or PEPP, will increase by €600 billion to €1.35 trillion and stretch until at least the end of June 2021. “The PEPP expansion will further ease the general monetary policy stance … especially for businesses and households,” said ECB President Christine Lagarde, addressing journalists after the central bank’s governing council meeting earlier on Thursday.
The ECB president repeatedly stressed the “flexibility” measures embedded in the program, saying that asset purchases would occur across “time, market segments and jurisdictions.”
However, she declined to discuss any permanent changes to the bank’s capital key, which ensures that sovereign bond purchases are conducted in proportion to the size of national economies. She did concede that the governing council has assessed “that there was a strong and urgent need of deviation” from that formula in recent weeks.
Analysts believe the program could run out of cash by February, raising questions over whether the ECB intends to implement further measures, such as a further cut in record-low interest rates, particularly with inflation expected to remain well below the ECB’s target through 2022.
In updated forecasts released on Thursday, the ECB predicted a fall in HICP inflation to an annual rate of 0.3% in 2020, rising only to 1.3% two years later, well below the bank’s target of close to, but less than 2%.
However, Lagarde suggested that further moves may come after the ECB collects more complete economic data … which would allow the governing council “to come up with more reliable scenarios and even a projection” of future growth rates.
The ECB expects Eurozone output to contract by 8.7% in 2020, under its baseline scenario, toward the lower end of the 8-12% slump recently cited by the president, with growth rebounding by 5.2% in 2021.
But under a severe scenario, published after Lagarde’s briefing, output could slump by 12.6% this year, with unemployment rising to 11.3% from 6.6% in April. Under the bank’s mild scenario, gross domestic product would contract by 5.9% this year.