THE EUROPEAN CENTRAL Bank has indicated that it stands ready to inject more stimulus into the euro zone economy in December depending on the “dynamics of the virus”.

This morning, the governing council of the ECB decided against tinkering with its monetary policy instruments and exchange rates for the time being despite a rising tide of virus cases and lockdown measures across the continent.

However, the bank said that currently, “risks are clearly tilted on the downside”.

In a statement, the council said that it would “carefully assess the incoming information, including the dynamics of the pandemic, prospects for a rollout of vaccines and developments in the exchange rate” ahead of its next meeting.

“The new round of Eurosystem staff macroeconomic projections in December will allow a thorough reassessment of the economic outlook and the balance of risks,” the ECB said.

Those projections will also allow the bank’s policymakers to “recalibrate its instruments… to respond to the unfolding situation and to ensure that financing conditions remain favourable to support the economic recovery”.

“In the meantime”, said ECB President Christine Lagarde at a virtual press conference this afternoon, “we have decided to reconfirm our accommodative monetary policy stance.”

Financial firepower

By ‘recalibration’, it’s widely accepted that Lagarde means an increase in the €1.35 trillion Pandemic Emergency Purchasing Programme (PEPP), a bond-buying initiative rolled out in March and due to run well into next year.

It might also mean upping the financial firepower of other ECB asset purchase programmes.

This afternoon, Lagarde said that ECB staff members were already looking into what the December revamp of its policy tools might entail.

“This recalibration exercise will touch on all our instrument instruments,” she said.

“It is not going to be looking at one single instrument, it will be looking at all our instruments, how they interact together.” 

Because of the pandemic, most euro area states — but particularly, harder-hit countries like Italy — have had to massively increase borrowing by issuing more and more debt.  

The strategy behind the PEPP is to buy up large tranches of mostly government but also private bonds, in part to help keep down borrowing costs for euro zone countries. 

The ECB has, for example, snapped up more of than half of the Irish government bonds issued in 2020.

The PEPP is also designed to keep cheap money flowing into banks and other financial institutions in order to facilitate lending to businesses and to combat deflationary pressures.

Some analysts believe the PEPP could be topped up by as much as €500 billion in December against the backdrop of gloomy economic forecasts.

“The rise in COVID-19 cases and the associated intensification of containment measures are weighing on activity,” Lagarde said this afternoon, “constituting a clear deterioration in the near term outlook.”

In particular, she said that activity in the services sector has been “slowing visibly” after “a partial and uneven rebound in economic activity over the summer months”.