The European Central Bank bolstered its coronavirus quantitative easing program and recalibrated other monetary policy instruments at its December meeting as it downgraded growth forecasts for 2021 amid a resurgent pandemic.
The ECB expanded the Pandemic Emergency Purchase Program, or PEPP, by €500 billion to a total of €1.85 trillion and extended its duration to at least the end of March 2022. The decision comes amid the reintroduction of stringent coronavirus restrictions and national lockdowns across Europe due to a fresh spike in COVID-19 cases.
Net purchases will be conducted until the Governing Council deems that the coronavirus crisis phase is over, the ECB said in a statement.
"The extension of our PEPP purchases over a longer horizon reflects the prolonged fallout from the pandemic for the economy and inflation," ECB President Christine Lagarde said at a press conference. "It allows for a continuous market presence and more durable support from our monetary stimulus."
In addition, the ECB extended the reinvestment of principal payments from maturing securities under the pandemic QE program until at least the end of 2023.
Revised GDP forecasts
Lagarde said the eurozone is expected to post a "significant decline" in fourth-quarter economic activity due to the new containment measures that were imposed to stem the resurgence in COVID-19 cases.
"Overall, the incoming data and our staff projections suggest a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged," the ECB president said.
Eurozone real GDP is now expected to contract by 7.3% in 2020, according to the latest Eurosystem staff projections, compared with a 8.0% slump estimated in September.
The projected growth rebound in 2021 was lowered to 3.9% from 5.0%. In a "severe" scenario that entails a delayed resolution of the pandemic, real GDP would only marginally increase in 2021, the ECB warned. The growth forecast for 2022 was revised to 4.2% from 3.2%.
"Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced," Lagarde said.
Recalibrated policy instruments
The interest rate on the main refinancing operations remained at 0%, the ECB said, while the rates on the marginal lending and deposit facilities stayed at 0.25% and negative 0.50%, respectively.
The ECB extended the duration of the period over which favorable terms will be applied to its targeted longer-term refinancing operations by 12 months to June 2022, and announced that three additional operations will be conducted between June and December 2021. It also increased the amount counterparties are allowed to borrow in the operations to 55% from 50% of their stock of eligible loans.
As part of the recalibrated measures, the ECB also extended the duration of the collateral easing measures it adopted in April to June 2022, and said it would offer four more pandemic emergency longer-term refinancing operations in 2021.
The ECB also said it will continue to make purchases under its asset purchase program, or APP, at a monthly pace of €20 billion for as long as necessary. The bank expects to end the program before it raises interest rates.
The bank said it will reinvest principal payments from maturing securities purchased under the APP for an extended period of time after raising policy rates, or for as long as necessary to ensure monetary accommodation.
The Eurosystem repo facility for central banks and temporary swap and repo lines with non-euro area central banks will be lengthened until March 2022, the ECB added.