MNI REVIEW: ECB Boosts PEPP, TLTROs, As Covid Hits Eurozone

The European Central Bank expanded its pandemic emergency purchase programme on Thursday as the economy struggles under the impact of a fresh wave of Covid-19, but president Christine Lagarde said the full additional envelope may not be used in full if financing conditions remain favourable.

The EUR500 billion expansion takes the PEPP to EUR 1.85 trillion, with Lagarde announcing an extension in the programme's duration, to at least March 2022, with reinvestments of principal set to continue until at least December 2023. The ECB also promised more cheap funding for banks, as Lagarde linked the extension of several of the ECB's key policy tools to the speed at which the eurozone achieves herd immunity thanks to vaccines against Covid-19.

"If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full, Lagarde said, confirming an earlier report by MNI. "Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation."

The ECB will provide three new targeted longer-term refinancing operations (TLTRO), with improved terms for banks willing to meet new real economy lending requirements before June 2022. Four rounds of the ECB's specially-created Pandemic Emergency Targeted Lending Operations will take place between June and December next year.

PRE-COVID QE EXTENDED

Banks taking advantage of the new terms should take responsibility for managing the risk of new loans by carefully assessing lending criteria, Lagarde explained, amid concerns over the growth of bad debts as a result of the pandemic.

Fixed rate tender procedures with full allotment will continue at the prevailing conditions "for as long as necessary," and the temporary collateral framework announced in April this year was extended to June 2022.

The ECB also extended its pre-Covid quantitative easing, saying that its asset purchase programme would continue at its monthly pace of EUR20 billion and will not end until "shortly before" it starts raising key interest rates.

Interest rates will remain unchanged at their current levels, Lagarde said, though she reiterated that the ECB stands ready to adjust all its tools as required.

December's ECB projections for annual inflation declined from 0.3% to 0.2% for 2020, held steady at 1.0% for 2021, and was reduced 20bps to 1.1% in 2022. It should reach 1.4% in 2023, Lagarde announced. Real euro area GDP is expected to contract by 7.3% in 2020, before growing y 3.9% in 2021, 4.2% in 2022 and 2.1% in 2023.

Euro area risks remain tilted to the downside, Lagarde said, but have become less pronounced. The ECB will also monitor exchange rate developments "very carefully," though achieving a competitive euro is not a policy target, she reminded journalists during the press conference following December's Governing Council meeting.