ECB Expands Stimulus Program to Prop Up Pandemic-Hit Economy -- 4th Update

By Tom Fairless

FRANKFURT -- The European Central Bank scaled up its emergency bond-buying program by more than a third and unveiled a new batch of ultracheap loans for banks, a bold stimulus package aimed at backstopping the region's governments and businesses as they navigate a stubborn resurgence of the Covid-19 pandemic.

The move, which takes the ECB's monetary stimulus this year above 3 trillion euros, equivalent to $3.6 trillion, underscores the rocky path ahead for the 19-nation eurozone economy. Europe has been hit much harder than the U.S. and other advanced economies as strict lockdowns have repeatedly closed businesses and hurt the south's large tourism industry.

Together with a new EUR750 billion joint fund that European Union leaders signed off on Thursday, after Hungary and Poland dropped their concerns about a mechanism that could have deprived them of future budget funds, the ECB's decision underscores Europe's willingness to combat this year's economic downturn using new debt. That marks a shift in strategy from the region's debt crisis a decade ago, when many governments sought to quickly tighten their purse strings.

At a news conference in Frankfurt, ECB President Christine Lagarde warned that the roughly $13 trillion eurozone economy would likely slip back into contraction in the last three months of this year, and grow more slowly than expected next year, as businesses and households are buffeted by new restrictions aimed at containing the virus.

Still, Ms. Lagarde said there are "good reasons to believe" that Europe will have attained effective herd immunity by the end of 2021, meaning that vaccinations will be widespread enough to prevent new infections and allow the economy to function normally again.

The recent rollout of vaccines "allows for greater confidence...[but] it will take time until widespread immunity is achieved, while further resurgences in infections, with challenges to public health and economic prospects, cannot be ruled out," Ms. Lagarde said. She unveiled gloomy economic forecasts suggesting that eurozone inflation, which the ECB aims to keep just below 2%, would only reach 1.4% by 2023.

In response, the ECB said it would scale up its emergency bond-buying program, first unveiled in March, by EUR500 billion to EUR1.85 trillion, and extend the expected time horizon of its purchases by nine months, through March 2022. The bank also rolled out new cheap loans for banks and sweetened the terms of its existing loans. It left its key interest rate unchanged at minus 0.5%.

The fresh stimulus means the ECB will continue to absorb roughly three-quarters of the debt issued by eurozone countries next year, according to estimates from Pictet Wealth Management. That supports the region's governments as they spend freely on job-furlough schemes and other costly programs aimed at keeping businesses and jobs alive.

"This is a carte blanche for the finance ministers...The ECB is likely to finance de facto the entire 2021 budget deficits of the euro countries," said Joerg Kraemer, chief economist at Commerzbank in Frankfurt.

Market reaction was subdued, however, because the stimulus had been widely expected. The euro rose about half a cent against the dollar to $1.215, before retreating. Yields on Italian government debt, the riskiest among the area's major economies, hovered near multiyear lows, indicating that investors were comfortable with the bank's efforts to keep the financial system flush with cash.

"We can't help but feel like the ECB should have delivered a bolder package... to make sure that they don't need to do more next year in case something goes wrong again," said Frederik Ducrozet, an economist with Pictet Wealth Management in Geneva.

While the rollout of a vaccine in some parts of the world in recent days suggests social restrictions could be eliminated during the course of next year, policy makers worry that the economic recovery is likely to remain bumpy at least until widespread immunity has been achieved.

The U.K.'s statistics agency Thursday said economic growth slowed in October as new infections rose and restrictions were tightened. The economy expanded 0.4% from the previous month, having grown 1.1% in September.

Japan this week announced a new roughly $700 billion economic stimulus package aimed at speeding up the recovery from the country's deep, virus-driven slump. In the U.S., an approximately $900 billion coronavirus aid plan is being debated in Congress.

Federal Reserve officials are expected at their Dec. 15-16 meeting to issue new guidance about how long they expect to continue their asset-purchase program, under which the Fed is currently buying $120 billion a month in Treasurys and mortgage-backed securities. Fed officials have signaled recently that they don't think they need to change the asset-buying program now to deliver more economic stimulus.

With infection rates still high, governments in Germany, France and other countries have signaled in recent days that they will tighten or extend restrictions in the weeks ahead. Policy makers worry that consumers could grow more cautious about spending amid rising virus cases and hospitalizations.

Adding to policy makers' concerns: The euro has staged a recent rally against the dollar, reaching a two-year high of $1.21 and hurting the competitiveness of Europe's large exporters in crucial overseas markets such as the U.S.

Analysts expect the euro to appreciate further against the dollar over the coming months, especially after the ECB decided not to cut its key interest rate or take other concrete steps that could weaken the common currency.

Ms. Lagarde told reporters that the ECB was monitoring the exchange rate. She also noted that growth in credit to corporates had plateaued because companies are no longer asking for emergency liquidity and investments have fallen.

Regulators, including the ECB's own banking supervision arm, are increasingly putting pressure on banks to make sure they are properly accounting for loans in their books that could turn sour. The pressure, and fears over the economic recovery, have made lenders more careful.

Tom Kinmonth, a fixed income strategist at Dutch bank ABN AMRO Bank NV, said the ECB's stimulus package was disappointing for banks because it only provided tweaks to existing programs.

"Overall, the ECB has kept the conditions favorable for banks, but it has not given the banks a large Christmas gift," he said.

--Paul Hannon in London and Patricia Kowsmann in Lisbon contributed to this article.

Write to Tom Fairless at [e-mail]

(END) Dow Jones Newswires

12-10-20 1544ET