Eurozone on the brink: ‘Unprecedented contraction’ prompts €1.35 trillion bond-buying plan

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ECB president Christine Lagarde warned the eurozone faced an “unprecedented contraction” because of the pandemic and claimed early signs of a rebound as lockdowns are eased were “tepid”. The eurozone has been devastated by government-implemented restrictions on movement and businesses and the economy can expect to shrink 8.7 percent this year, she said. As countries gradually reopen their economies, there are signs of the slump “bottoming out”, the ECB chief added.

“The euro area economy is experiencing an unprecedented contraction. There has been an abrupt drop in economic activity as a result of the coronavirus pandemic and the measures taken to contain it,” Ms Lagarde said.

She added the “improvement has been tepid compared with the speed at which economic indicators plummeted in the preceding months”.

The bigger-than-expected stimulus package announced today will raise the central bank’s total bond purchases to €1.35 trillion.

New forecasts published by the ECB, predicted the eurozone would shrink by 8.7 percent this year before expanding by 5.2 percent in 2021 and 3.3 percent in 2022.

The bond purchases will run until at least June 2021, six months longer than initially planned by the ECB.

It also said it would invest the proceeds from maturing bonds in its pandemic scheme until the end of 2022.

“Today’s easing measures were another illustration that the ECB means business and stands ready to do whatever is necessary to help the euro area survive the corona crisis in one piece. The ECB will do its part, and it hopes the governments will do their part,” Nordea analysts said in a note.

Experts suggested fresh quantitative easing injection was a result of Ms Lagarde attempting to make amends for giving the impression in March that she was reluctant to combat a sell-off in southern European bonds.

Kenneth Wattret, chief European economist at IHS MarkIt, said: “To judge by the size of today’s uplift, it appears that Lagarde has well and truly learned her lesson from early March’s mis-step.

“The ECB has bought itself some time but the pressure will inevitably build to do more.”

Some investors had worried that the ECB’s initial bond-buying blueprint would not be sufficient to absorb the expected extra debts issued by eurozone governments – estimated to be between €1 trillion and €1.5 trillion.

The Frankfurt-based central bank also slashed its inflation forecasts to 0.3 percent this year, 0.8 percent next year and 1.3 percent in 2022.

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Announcing the decision, it said: “In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households.”

The ECB also decided to keep its main deposit rate unchanged at -0.5 percent, adding: “The maturing principle payments from securities purchased under the PEPP will be reinvested until at least the end of 2022.”

The announcement, which comes just weeks after Germany’s Constitutional Court ruled that the ECB had already been exceeding its mandate with a longstanding asset purchase programme, prompted a rally in the euro and bond markets.

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The ECB has vowed to review the eligibility status of the bonds it buys in the future.

“We have defined our parameters for our purchases,” Ms Lagarde said.

“We will continue to observe the situation and take appropriate and proportionate action,” she added. “Aside from that, the governing council has not discussed this matter.”

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