Scale of new programme and willingness to raise limits show new determination – Following an emergency meeting yesterday evening, the ECB announced a new asset purchase programme and signalled its willingness to do more. Following an underwhelming package last week and a number of communication mishaps, the ECB appears to have returned to the ‘whatever it takes’ mentality we saw in 2012 and 2015. The key takeaways are:
- The new programme is big. It dwarfs its current asset purchases. Its new Pandemic Emergency Purchase Programme (PEPP) will total EUR 750bn, with purchases conducted until the end of 2020 and including the same asset classes as the APP. Together with the purchases under the APP, total purchases in 2020 will be more than a trillion euros. This will be the largest amount of net purchases in any single year since QE began.
- The ECB signalled a determination to do more if necessary. In its statement the Governing Council signalled that ‘it is fully prepared to increase the size of its asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed’. To emphasise this point it signalled a willingness to raise the issue(r) limits noting that it ‘will consider revising them to the extent necessary to make its action proportionate to the risks that we face’. The language on country spreads was unequivocal noting that the ECB ‘will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area’. The inclusion of Greece in the PEPP and commercial paper in the CSPP also showed a new spirit of determination.
- Macro stimulus still falls short in the eurozone. The scale of purchases in 2020 brings them closer to a level where they will have a more notable macroeconomic impact. Given past estimates by the ECB, the net purchases would boost GDP growth by around 0.4-0.5 percentage points over time. Perhaps the effects could be larger given that they will help to alleviate the current stress in sovereign bond markets.
However, the shock to the economy from the coronavirus is several times that. For instance, we expect GDP to fall by 2.7% this year. We are assuming extra discretionary fiscal stimulus of around 1.2% GDP, based on what we have seen so far from governments. That would tend to add half as much to growth. So the macro stimulus so far is around 1% GDP. Both the ECB and governments will likely need to do more.
- New PEPP should boost government bonds. The size of the programme should give a significant boost to government bond prices, especially peripherals. We will publish a Rates Watch shortly to discuss the programme and impact on rates markets in more detail.