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European Central Bank Unveils Fresh Stimulus

ecbank sep12 10dec20 lt

European Central Bank announced a fresh round of stimulus in the form of more asset purchases and ultra cheap loans to banks, on Thursday to support the euro area economy amid the heightened uncertainty surrounding the coronavirus pandemic.

"The monetary policy measures taken today will contribute to preserving favorable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability," the ECB said in a statement.

"At the same time, uncertainty remains high, including with regard to the dynamics of the pandemic and the timing of vaccine roll-outs."

Policymakers will continue to monitor developments in the exchange rate, and they 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, the bank said.

Delivering on its promise of a recalibration of the monetary policy instruments, the ECB increased the size of its pandemic emergency purchase programme, or PEPP, by EUR 500 billion to a total of EUR 1,850 billion.

The horizon for net purchases under the PEPP was extended to at least the end of March 2022. The bank said the Governing Council will conduct net purchases until it judges that the coronavirus crisis phase is over.

The reinvestment of principal payments from maturing securities purchased under the PEPP was extended until at least till the end of 2023. The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance, the bank reiterated.

Policymakers also decided to further recalibrate the conditions of the third series of targeted longer-term refinancing operations or TLTRO III and decided to extend the period over which considerably more favorable terms will apply by twelve months, to June 2022.

The ECB also said it will conduct three additional TLTRO III operations between June and December 2021.

Further, the bank raised the borrowing limit for counterparties in TLTRO III operations from 50 per cent to 55 per cent of their stock of eligible loans.

The central bank also said that the recalibrated TLTRO III borrowing conditions will be made available only to banks that achieve a new lending performance target. This is meant to provide an incentive for banks to sustain the current level of bank lending.

In its previous meeting on October 29, ECB President Christine Lagarde had clearly signaled that the bank was ready to take policy action in December as policymakers will be presented with the latest set of ECB staff macroeconomic projections.

Policymakers' comments thereafter had also hinted at a possible expansion of the pandemic emergency purchase programme, or PEPP, and more targeted lending to banks in the form of TLTROs.

The resurgence in the coronavirus or Covid-19 pandemic has seen countries like Germany and France return to partial lockdown. However, the news of vaccine approval has kindled hopes of an economic revival across the world.

"All these steps are real central bank engineering, something ECB President Christine Lagarde called 'recalibration' at the October meeting, but no actual stepping up of monetary stimulus," ING economist Carsten Brzeski said.

"Instead, the ECB's main aim is to extend the current level of monetary accommodation until mid-2022."

On Thursday, the bank left its three interest rates unchanged as expected. The main refi rate was retained at a record low zero percent and the deposit rate was kept at -0.50 percent. The lending rate was left unchanged at 0.25 percent.

The Governing Council retained its forward guidance on interest rates, saying it 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 percent within its projection horizon.

In other stimulus measures unveiled on Thursday, the ECB decided to extend to June 2022 the duration of the set of collateral easing measures adopted by the Governing Council on April 7 and 22 this year. These will be reviewed before June 2022, the bank said.

The Governing Council also decided to offer four additional pandemic emergency longer-term refinancing operations, or PELTROs, in 2021, which the ECB said will continue to provide an effective liquidity backstop.

The size of the monthly asset purchases under the asset purchase programme (APP) was retained at EUR 20 billion. Rate-setters continue 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.

The ECB also extended the Eurosystem repo facility for central banks (EUREP) and all temporary swap and repo lines with non-euro area central banks until March 2022.

The regular lending operations will continue as fixed rate tender procedures with full allotment at the prevailing conditions for as long as necessary, the bank said.

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