THE EUROPEAN CENTRAL Bank has increased its €1.35 trillion emergency bond-buying programme by €500 billion and extended it into March 2022.

The move was announced this afternoon following a meeting of the ECB’s governing council in Frankfurt. 

The central bank also decided to keep interest rates unchanged at historically low levels and to keep providing cheap cash to European banks through its targeted longer-term refinancing operations (TLTROs).

Rolled out in April when the euro zone was plunged into a deep recession, the main goal of the PEPP is to keep down borrowing costs for member states low to prevent a pandemic-linked credit crisis within the single currency area.

The strategy behind the PEPP is to print money and use it to buy up large tranches of mostly government bonds to create a baseline of demand for extra debt issuances by euro area member states.

It has helped prevent the likes of Italy and Spain — both of which have high levels of historic debt — from being shut out of international debt markets at a time when they need to borrow to fund emergency government programmes.

The ECB has also snapped up more of than half of the €21.5 billion in Irish government bonds issued in 2020.

ECB PEPP: the €500bn boost, to €1850bn, along with the extension until March 2022 (rather than June) looks like a compromise between the hawks and the doves, but it will also make it possible to increase the pace of purchases over €15bn/week, if needed. pic.twitter.com/oL4TB4MEQJ

— Frederik Ducrozet (@fwred) December 10, 2020

In a statement following the meeting, the ECB said, “The Governing Council decided to increase the envelope of the pandemic emergency purchase programme (PEPP) by €500 billion to a total of €1,850 billion.

“It also extended the horizon for net purchases under the PEPP to at least the end of March 2022. In any case, the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over.”

Gloomy forecasts

Necessitated by gloomy economic forecasts, this morning’s expansion of the PEPP has been long-signalled.

The euro zone economy is also experiencing issues around price deflation and the strengthening of the euro against the dollar.

This makes making European exports less competitive at the same time as making imports from the US cheaper and more attractive, a significant threat to recovery forecasts.

In September, ECB President Christine Lagarde warned that the rise in Covid case numbers across Europe in the third quarter of the year “and the associated intensification of containment measures are weighing on activity”.

Speaking at a press conference this afternoon, Lagarde said that the rebound in activity in the third quarter of the year was better than expected.

However, she said that it likely fizzled out in the fourth quarter as European governments reimposed lockdown measures.

“What we have decided — as was anticipated as a result of the October monetary policy discussions that we had — is a recalibration of those instruments that were determined were most effective under the current pandemic circumstance,” she said.

“And it is with that in mind, that we decided to concentrate the recalibration on PEPP:  our temporary targeted and flexible asset purchase programme that is specifically designed for the pandemic.” 

Today, the central bank said that decision will “contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy”.

“At the same time, uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine rollouts… The Governing Council, therefore, continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner,” it said.