ECB May Opt for 12-Month Extension to Emergency Bond Program
(Bloomberg) -- European Central Bank policy makers would probably agree to extend their pandemic bond-buying program by a full year until the middle of 2022 if that is proposed by the Executive Board next week, according to officials familiar with the situation.
Several members of the Governing Council would support a 12-month extension, even those who have a personal preference for six months, the officials said.
Such a move would beat expectations. Economists surveyed by Bloomberg this week predicted the crisis measures -- intended to keep borrowing costs low to help the euro-area economy through the pandemic -- will be stretched out by six months to the end of 2021, and expanded by 500 billion euros ($608 billion) to 1.85 trillion euros. The decision is scheduled for Dec. 10.
There is still a possibility of dissent, with some policy makers concerned that running well into 2022 involves making unwarranted assumptions about the post-pandemic economy. President Christine Lagarde may struggle to reach unanimity on the 25-person council, some of the officials said.
One central bank has suggested a 12-month extension with the option to reduce it again if the recovery proves stronger than expected, one official said.
Policy makers are also braced for the discussion on the size of the bond program. Several want the increase to be no more than 500 billion euros but Lane, the ECB’s chief economist, is angling for a bigger increase, according to one official.
An ECB spokesman declined to comment.
What Bloomberg Economics Says
“We anticipate an extension by six months to the end of 2021, but a nine or 12-month extension is a possibility.”
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The stimulus debate hinges on when the “crisis phase” of the pandemic can be considered over, so emergency measures can make way for more conventional tools. That’s the term policy makers have used to justify the exceptional power and flexibility of the 1.35 trillion-euro bond-buying program.
While policy makers agree they’ll need to keep providing support past the rollout of coronavirus vaccines, the direct impact of the pandemic on the economy will fade. The ECB’s emergency stimulus is explicitly intended to be temporary because it overrides constraints on earlier programs that were intended to avoid breaching European Union law.
Governing Council members appear to be accepting that next year may be too soon to decide for sure how long the program should run, and are willing to extend it avoid that uncertainty hanging over the economy.
Some have already publicly highlighted the possibility. Executive Board member Isabel Schnabel said in a Bloomberg interview this week that purchasing debt through the middle of 2022 is one option that will be considered. Latvia’s Martins Kazaks told Bloomberg in a separate interview that he would support such a decision.
Lagarde has repeatedly said the meeting will “recalibrate” policy, with emergency asset purchases and bank lending the primary tools. Economists also anticipate new long-term loans, and say the ultra-low interest rate on existing loans will be available for longer.
Lane used a speech last week to highlight “worrying signals” of tighter lending standards and access to finance for small and medium-sized enterprises. That echoes language in June, just before the ECB almost doubled its pandemic program and extended it.
He also stressed the need to get inflation -- currently -0.3% -- back on the path toward the goal of just-under 2% without delay. Policy makers worried that the emergency stimulus risks becoming quasi-permanent are likely to be wary of taking that argument too far.
“There’s agreement on the Governing Council that the pandemic response runs a bit beyond the point at which the health emergency has been dealt with,” said Jacob Nell, an economist at Morgan Stanley. “There’s probably no agreement that it lasts until the ECB can claim inflation is back to its pre-Covid trajectory.”
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