ECB ‘Recalibrates’ Easing Measures. Ups Pandemic QE Program To €1.85 Trillion

As expected, the ECB topped up its emergency pandemic QE program (PEPP), adding €500 billion in firepower to the facility, which serves as the cornerstone of Christine Lagarde’s crisis-fighting effort.

Europe is grappling with an aggressive second wave of COVID-19, and associated lockdowns are generally expected to tip the region into a double-dip downturn.

“In view of the economic fallout from the resurgence of the pandemic… The Governing Council decided to increase the envelope of the pandemic emergency purchase program by €500 billion to a total of €1,850 billion,” the December statement reads. Purchases under PEPP will run for an additional nine months, until March of 2022, or “until [the ECB] judges that the coronavirus crisis phase is over.”

In addition to the effects from recent lockdowns across the bloc’s largest economies, a strong euro is another headache for the ECB in its efforts to resurrect inflation, which plunged below zero on various pandemic effects that should start to fade, but not for another couple of months.

Headline inflation remained negative for a fourth month in November, while core is stuck at a record low.

Again, the currency’s rally isn’t helping and market participants were keen to hear from Lagarde on that issue at Thursday’s press conference.

New projections for the economy and inflation will also influence the path of the euro, which surged earlier this year in anticipation of jointly-guaranteed fiscal action to help shore up economies in the wake of the crisis.

The ECB said Thursday it will extend the reinvestment of principal payments from maturing securities purchased under the PEPP until at least the end of 2023. Future roll-off of the PEPP portfolio “will be managed to avoid interference with the appropriate monetary policy stance,” the ECB said.

Late last month, one Italian official called for debt purchased under PEPP to be canceled, a suggestion that was subsequently played down in an effort to avoid irritating the powers that be.

The ECB’s efforts have been effective at further distorting the European bond market, that’s for sure. Five-year yields on Italian debt turned negative Wednesday, for example. Consider that they were above 2.56% during the initial days of the pandemic in March. On Tuesday, Portugal’s 10- year yield dipped below zero for the first time, and Spain’s 10-year yield fell to a record low at 0.014% Wednesday.

Essentially, the market is pricing no risk at all for this debt, and it’s no secret why. The ECB, under Mario Draghi, explicitly dedicated itself to stamping out fragmentation risk at any cost, and the pandemic renewed the sense of urgency. Lagarde’s trial by fire is getting hotter, but at the risk of delivering a “famous last words” assessment, she seems to be handling it with grace.

In addition to topping up PEPP, the ECB extended the window for access to favorable terms in TLTRO III ops to June of 2022, extended the duration of more forgiving collateral rules in order to ensure access to those facilities, raised the total amount that counterparties can borrow in TLTRO III ops to 55% (from 50%) of their eligible loans, added four more pandemic emergency refi ops for 2021, and, of course, committed to the continuation of “regular” QE at the usual clip of €20 billion per month. Oh, and Lagarde is also extending swap lines for eurosystem banks to March of 2022.

The euro got a mention in the statement. “We will also continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook,” the ECB said. That’s a warning to the market.

As far as the outlook, the GC noted the obvious. “Uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs.”



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