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ECB holds euro interest rate and extends pandemic support to 2022

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Oscar Williams-Grut
·Senior City Correspondent, Yahoo Finance UK
·4-min read
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European Central Bank president Christine Lagarde. Photo: Geoffroy van der Hasselt/AFP via Getty Images
European Central Bank president Christine Lagarde. Photo: Geoffroy van der Hasselt/AFP via Getty Images

The European Central Bank (ECB) left the eurozone’s interest rates unchanged on Thursday but altered its package of COVID-19 support measures, extending several key policies into 2022.

At its December policy meeting, the ECB’s governing council extended and expanded several programmes that offered support and liquidity to banks and the real economy.

Many of the ECB’s COVID-era programmes were extended until 2022. Thursday’s changes were intended to reassure investors, governments, and businesses that support will remain in place for the duration of the COVID recovery. The euro spiked against the dollar (EURUSD=X) in the wake of the announcement.

In its policy statement, the ECB said it was maintaining the eurozone deposit rate at -0.50%, the refinancing rate at 0%, and the marginal lending facility rate at 0.25%.

As had widely been expected, the central bank announced changes to its package of non-conventional monetary tools. The changes were motivated by “the economic fallout from the resurgence of the pandemic,” the governing council said — a reference to the COVID-19 second wave that has swept Europe.

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The ECB added €500bn (£456bn, $605bn) to its pandemic emergency purchase programme (PEPP), taking the total envelop to €1.85tn. The ECB buys government and private sector debt through PEPP in a bid to support businesses and governments through the crisis. The scheme was first announced in March with an initial budget of €750bn (£679bn, $909bn).

PEPP was due to run until at least June 2021 but the ECB extended the lifetime of the programme until “at least the end of March 2022.” Funds from the programme will now be reinvested until the end of 2023.

Elsewhere, the central bank extended the generous terms of its targeted longer-term refinancing operations (TLTRO). The scheme offers cheap credit to banks to encourage them to lend to businesses. More generous TLTRO interest rates were introduced in light of the pandemic and these were extended for 12 months until the end of June 2022. Collateral requirements were eased in April and the ECB said the looser requirements would stay in place until June 2022. Banks can now also borrow more as a proportion of their asset under the TLTRO programmes, the ECB said.

Additionally, the ECB said it would conduct four pandemic-specific long-term refinancing operations next year. This new tool was first deployed in April and is not tied to lending requirements.

Swap lines with central banks were extended until March 2022. These facilities give central banks around the world easy access to a supply of euros to help prevent liquidity crises.

READ MORE: ECB: Eurozone economy set for slower COVID recovery

The ECB maintained its non-emergency asset purchase programme at its current monthly pace of €20bn.

ECB President Christine Lagarde said the changes would help by “supporting the flow of credit to all sectors of the economy, underpinning economic activity, and safeguarding medium term price stability”.

“All these steps are real central bank engineering, something ECB president Christine Lagarde called ‘recalibration’ at the October meeting, but no actual stepping up of monetary stimulus,” said Carsten Brzeski, global head of macro at ING. “Instead, the ECB’s main aim is to extend the current level of monetary accommodation until mid-2022.”

Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said: “Overall, this is a solid package, both in its own right, not to mention that it delivers what markets expected, which is a key signal as well.”

The euro was up 0.3% against the dollar to $1.2116 shortly after the announcement.

The euro spiked against the dollar in the wake of the policy statement. Photo: Yahoo Finance UK
The euro spiked against the dollar in the wake of the policy statement. Photo: Yahoo Finance UK

The backdrop to the policy changes, which had been widely expected, was a worsening outlook for the eurozone.

Economists at the ECB on Thursday cut their forecast for eurozone growth in 2021 from 5% to 3.9%, reflecting the impact of the COVID-19 second wave.

“Overall, the incoming data and staff projects suggest a more pronounced near-term impact of the pandemic and a more protracted weakness in inflation than previously envisioned,” Lagarde said during a press conference.

While recent positive news about vaccines has improved the outlook somewhat, the ECB said: “Uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs.”

In recent months the euro has rallied strongly against the dollar, complicating the picture for policy makers. A resurgent euro has implications for the ECB’s 2% inflation target and price stability. Inflation hit 1% in November, up from 0.7% in the prior month.

The governing council said it “stand[s] ready to adjust all of its instruments, as appropriate.”

Lagarde said the ECB would “continue to monitor developments in the exchange rate with regards to their possible implications for the medium term inflation outlook”. Pressed on why rates were left unchanged this time out, Lagarde suggested the governing council would not hesitate to cut rates in future.

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