ECB increases debt purchases due to pandemic by 600 billion euros

The European Central Bank has announced that it will increase the volume of emergency debt purchases in the face of the COVID-19 pandemic by 600 billion euros, to 1.35 trillion, due to the revision of inflation forecasts. The entity has informed that the Governing Council has also decided to extend its duration, "at least until the end of June 2021", when until now it had assured that it would buy debt in any case until the end of this year. It also maintains the main interest rates at 0%. 

Since the end of March, the institution chaired by Christine Lagarde has been buying euro area debt to deal with the impact of the COVID-19 pandemic on the financing conditions of countries that share the euro and plans to reinvest the principal of the securities acquired to deal with the pandemic until at least the end of 2022. The entity's latest macroeconomic projections indicate that there will be a fall in GDP of 8.7% by 2020, growth of 5.2% in 2021 and 3.3% in 2022. Inflation projections were lowered to 0.3% in 2020, 0.8% in 2021 and 1.3% in 2022. 

"The expansion of the procurement programme is a further sign of the European institutions' strong response to the pandemic. For Spain, one of the most affected members of the euro area, this is very positive news from a credit point of view. This will ensure very low financing rates over the next 12 months. However, the strong monetary response also reflects the deep recession Europe is facing and the prospect that it will take several years to recover from this crisis," said Alvise Lennkh, deputy director of public finance at Scope Ratings, in an email to the media. 

"With the extension of the pandemic procurement program until June 2021, in addition to the 750,000 already in place, Lagarde has exceeded the expectations of the market, which was expecting an additional $500 million. The ECB has highlighted the downward risks and uncertainties on the economy and warned of a fall of between 8% and 12% in the eurozone's GDP in 2020," explains Fraçois Raynaud, an economist with the Edmond de Rothschild consultancy firm in an e-mail communication to the media. 

Until 29th May the ECB had acquired debt to a total of 234,665 million of which 186,603 million were public debt, 35,384 million promissory notes and 10,579 million corporate bonds. The peculiarity of the new debt purchase program is that it is flexible and the ECB can buy more debt from a country at a given time if its risk premium shoots up in the market.

"These purchases will continue to be made flexibly over time, across asset classes and across jurisdictions," the ECB said Thursday. The Governing Council expects interest rates to remain at or below their current levels until it notes that the inflation outlook reaches a level somewhat below 2% and is reflected in developments in core inflation.

The ECB is also maintaining its previous programme of debt purchases at a monthly rate of EUR 20,000 million, which it expects to end shortly before it starts to raise official interest rates. It will also continue to invest the principal of securities acquired that mature until interest rates begin to rise. The entity also published today its new macroeconomic projections and expects a strong reduction in its growth forecasts.

"Lagarde wants to underline the independence of the ECB with this announcement, which is likely to be motivated by the recent ruling of the German Constitutional Court. The increase in debt purchases has been greater than expected by the market. It is a clear gesture that the European institutions are going to put all their machinery into preventing a breakdown of the common market," says Fraçois Raynaud, an economist with the consultancy Edmond de Rothschild in an email communication to the media.