By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank approved yet more stimulus on Thursday to prop up an economy plunged by the coronavirus pandemic into its biggest recession since World War Two.
Just months after a raft of emergency measures, the ECB said it would increase the size of emergency bond purchases by 600 billion euros ($ 674 billion) to 1.35 trillion euros and that the purchases would run until the end of June 2021, six month longer than originally planned.
The ECB also said it would reinvest bonds maturing in its pandemic emergency purchase scheme at least until the end of 2022.
As the downturn runs deeper and longer than expected, governments are running record deficits to cushion the impact of the pandemic, putting a greater burden on the ECB to soak up this new debt and keep borrowing costs manageable.
The ECB has always made clear it will do its part and Thursday’s move should reassure both governments and investors that it will not tolerate a rise in yields that might foster doubts about the viability of European debt.
“The Governing Council continues to 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 ECB said in a statement.
The bank earlier committed to buying up to 1.1 trillion euros worth of bonds this year. But even record purchases have struggled to bring down yields on debt issued by countries on the 19-nation bloc’s periphery, particularly Italy, hit hard by the virus and already struggling with a large debt burden.
More bond buys are also becoming urgent because the ECB is on track to exhaust its purchase quota by autumn, raising some doubts about its capacity or willingness to buy the amounts needed to keep yields down.
The programme is designed to create fiscal room for governments delving deep into their pockets to counter the effects of the pandemic.
Cash-rich Germany, which can borrow at negative rates for up to 20 years, unveiled a 130 billion euro ($ 145.85 billion) stimulus package late on Wednesday.
The euro () initially strengthened on the decision while 10-year German yields () eased around 2 basis points.
Attention now turns to ECB President Christine Lagarde’s 1230 GMT news conference, at which she will unveil new economic projections and face questions about further measures and the German Constitutional Court’s recent ruling on the ECB’s powers.
Although increasing the size of bond purchases was seen as the biggest step for the ECB, the bank still has some options to discuss at future meetings.
It still has to decide whether to buy bonds that lose their investment grade ratings, as the U.S. Federal Reserve does, and could also increase the exemption for banks from its punitive charge on excess reserves.
Another key issue for investors will be how the ECB responds to the German Constitutional Court’s recent ruling that the ECB has exceeded its mandate and the German Bundesbank must quit a key bond purchase scheme.
Although the ECB says only the European Court of Justice has jurisdiction over its work, board member Isabel Schnabel, herself a German, has said the bank is ready to play a constructive role in resolving the dispute.
With Thursday’s decision, the ECB also kept its main interest rate unchanged at 0% and its deposit rate, now its de facto benchmark, at minus 0.5%.
($ 1 = 0.8913 euros)
($ 1 = 0.8895 euros)