The ECB has spent less than a third of the €750 billion earmarked for its pandemic purchase program (PEPP), which means it’s time for calm reflection and a measured pace of buying until the envelope is exhausted, at which point policymakers can assess whether it makes sense to add more dry powder.
I’m just kidding.
Having spent just €234.7 billion so far, Christine Lagarde added another €600 billion on Thursday, bringing PEPP’s total firepower to €1.35 trillion. Optically, this is an upside surprise – the market was looking for a €500 billion addition.
“In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households”, the June ECB statement reads. “The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions [allowing] the Governing Council to effectively stave off risks to the smooth transmission of monetary policy”.
The “flexible” bit is important. The breakdown of purchases under PEPP (released for the first time this week) shows the ECB heavily favored Italian assets in a marked deviation from the capital key.
Since launch, Lagarde (who once declared it’s not the ECB’s job to compress periphery spreads), has purchased nearly €38 billion in Italian assets.
To be sure, the decision to top-up PEPP was expected. In fact, it was necessary to avoid upsetting a market which has become so enamored with the central bank’s crisis buying that Italy attracted record orders (in excess of €100 billion) for a 10-year syndicated sale this week.
In addition to upping the size of the program, the ECB extended it to “at least” the end of June 2021, and said PEPP buying will continue until the GC “judges that the coronavirus crisis phase is over”.
Additionally, the ECB notes that maturing principal payments from assets in the PEPP portfolio will be reinvested until at least the end of 2022. “The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary stance”, the ECB says.
“Regular” QE will continue at a pace of €20 billion per month for “as long as necessary to reinforce the accommodative impact of policy rates” which were left unchanged, as expected.
Lagarde has repeatedly warned that the economic situation in Europe will likely evolve (or maybe “devolve” is better) inline with the central bank’s downside scenario. Headline inflation flat-lined in the latest read.
The economy is showing signs of life as lockdowns are lifted, but second quarter GDP readings across countries will be extremely dire.
ECB purchases under PEPP are not technically under scrutiny by Germany’s constitutional court, which recently challenged the legality of asset purchases.
Suffice to say the central bank has not been persuaded to reconsider any aspect of its bond buying and will not be doing so in the future – or at least not at the urging of any one nation’s courts.
Thursday’s decision makes that abundantly clear, in case it wasn’t crystal already.
Full ECB statement
4 June 2020
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The envelope for the pandemic emergency purchase programme (PEPP) will be increased by €600 billion to a total of €1,350 billion. In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy.
(2) The horizon for net purchases under the PEPP will be extended to at least the end of June 2021. In any case, the Governing Council will conduct net asset purchases under the PEPP until it judges that the coronavirus crisis phase is over.
(3) The maturing principal payments from securities purchased under the PEPP will be reinvested until at least the end of 2022. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary stance.
(4) Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion, together with the purchases under the additional €120 billion temporary envelope until the end of the year. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
(5) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
(6) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.
