The bazooka's ammo remains the same, but the rate of shots increases. The Governing Council of the ECB has decided to leave unchanged the interest rates and the 1.850 billion endowment of the PEPP, the extraordinary securities purchase program designed to deal with the pandemic. At the same time, however, the Eurotower announces that - starting from the second quarter - the pace of purchases will be "significantly higher" than that recorded in the first months of the year.
In particular, the Governing Council will conduct the purchases "in a flexible manner, according to market conditions, in order to avoid a tightening of financing conditions that is incompatible with countering the downward effect of the pandemic on the expected path of inflation" .
The corollary is the same as always: “If favorable financing conditions can be maintained through flows of asset purchases that do not deplete the endowment over the PEPP net purchase horizon, it will not be necessary to fully use the endowment. Likewise, the envelope can be recalibrated, if required, to preserve favorable financing conditions that help counteract the negative shock of the pandemic on the inflation profile”.
LAGARDE: INFLATION WILL NOT LAST, STIMULI IS NEEDED
The news reassured the markets, alarmed in recent weeks by an unusually low level of purchases by the ECB. Investors feared that, in view of a possible rekindling of inflation, the central bank intended to moderate the expansiveness of monetary policy. Fears swept away by Christine Lagarde: in the press conference following the Council meeting, the number one of the ECB explained that inflation has increased over the last few months driven by temporary factors (such as the increase in energy prices) and that background pressures remain contained. At the same time, "an ample degree of monetary stimulus continues to be essential - specified Lagarde - in order to preserve favorable financing conditions in the period of the pandemic for all economic sectors".
The reaction of the markets was not long in coming: in the early afternoon the main European stock exchanges were positive (Milan +0,6%), while the spread between the Btp and the Bund fell to 92 basis points.
REINVESTMENTS UNTIL 2023
The ECB also reiterates that, as part of the PEPP, it will continue to reinvest the capital of maturing securities at least until the end of 2023. The program will not end before 31 March 2022 and, in any case, will go on until the central bank it will not consider the critical phase linked to Covid to be concluded.
THE “TRADITIONAL” QUANTITATIVE EASING
At the same time, quantitative easing will also continue at a rate of 20 billion a month traditional, i.e. the securities purchase program that was already in place before the pandemic. In this case, the ECB will reinvest the principal repaid on maturing securities "for an extended period of time after the date on which it starts raising the reference interest rates", and "in any case as long as necessary to maintain conditions of favorable liquidities and an ample degree of monetary accommodation”.
INTEREST RATES
As far as rates are concerned, the one on the main refinancing operations remains at zero, the marginal one at 0,25% and the one on deposits at -0,50%. The central bank confirms that the percentages will not rise “until the inflation outlook converges firmly to a level sufficiently close to, but below, 2% over its projection horizon and this convergence is not consistently reflected in underlying inflation dynamics ”.
REFINANCING OPERATIONS
Finally, the Eurotower will continue to provide liquidity to the financial system through its refinancing operations and stands ready “to adjust all of its tools, where appropriate, to ensure that inflation continues to approach its target level in a stable manner, in line with its commitment to symmetry".
THE OUTLOOK FOR 2021
Lagarde added that the ECB expects "a strong rebound in the economy during 2021", however, "although the situation is improving, uncertainties remain about the dynamics of the pandemic and the speed of vaccinations". Risk factors include “persistently high Covid infection rates, the spread of mutations and containment measures that are weighing on near-term activity.” In the Eurozone, Lagarde concluded, the first quarter will probably end with another contraction in GDP.
