09 december 2020
14:51
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The European Central Bank (ECB) is ready to announce additional bond purchases and more ultra-cheap financing for the banks on Thursday.
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The question is not whether the ECB is launching extra stimulus, but how much. ECB chairwoman Christine Lagarde signaled at the end of October that the central bank would announce new measures on 10 December to support the European economy. The pressure on the ECB has increased since then.
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The second wave of the corona pandemic has a major negative impact on economic activity in the fourth quarter. The first quarter of 2021 will also be difficult, as several countries maintain the restrictive measures until after the New Year.
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The ECB will have to admit that inflation will remain too low for at least another three years.
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In addition, the recent appreciation of the euro has worsened the inflation outlook. The single currency rose above USD 1.21, its highest level in more than two years. The ECB will have to admit on Thursday that inflation will remain below the target of ‘less than but close to 2 percent’ for at least three years. It will then publish an inflation forecast up to and including 2023 for the first time.
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500 billion extra
Lagarde signaled in October that the ECB would review all of its instruments. That is why economists expect a package of measures.
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Economists predict that the ECB will increase its bond purchase pandemic (PEPP) program by EUR 500 billion to EUR 1,850 billion. The program may also be extended by six months until December 2021.
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The additional bond purchases should prevent a rise in long-term interest rates.
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The additional bond purchases over a longer period should prevent a rise in long-term interest rates. The second wave of corona increases budget deficits, forcing governments to raise more money by issuing bonds. Without additional purchases from the ECB, the increased supply of government bonds would increase long-term interest rates.
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Support for banks
In addition, the ECB will provide more support to banks. ECB chief economist Philip Lane is concerned that banks tightened credit conditions in the third quarter. Tighter credit policy threatens to undermine the economic recovery.
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The banks can borrow money from the ECB at an interest rate of -1 percent until March if they keep lending to businesses and households up to standard. Because the interest is negative, the banks receive a subsidy. The ECB may decide to offer such super cheap loans even after March.
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Some economists believe this week’s measures will be the last round of extra stimulus. They note that the ECB cannot do much more than what it now plans to do.
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