ECB Seen Preparing More Aid as Virus Spread Derails Economy

(Bloomberg) -- Surging coronavirus infections and renewed lockdowns will prompt the European Central Bank to step up monetary stimulus later this year, according to economists surveyed by Bloomberg.

Respondents predict 500 billion euros ($590 billion) will be added to the 1.35 trillion-euro pandemic bond-buying program, with most anticipating action in December. The Governing Council will probably keep policy unchanged when it meets on Thursday to discuss the economic damage, though some analysts expect President Christine Lagarde to signal that more support is on the way.

With governments forced to restrict travel, close restaurants and impose curfews to contain the pandemic, the euro area’s recovery is already flagging, raising the specter of a double-dip recession. Lagarde has said the pickup in infections came sooner than expected, presenting a clear risk to the economic outlook.

“It’s come earlier, and from that point of view that has surprised. It’s not a good omen.” - Lagarde, Oct. 20

Still, there’s little reason for the ECB to rush. Less than half the money allocated to the emergency program has been spent, and updated economic projections won’t be available until December. Those will offer first estimates for 2023, and could help determine just how much stimulus is needed.

“The ECB will confirm that it is prepared to ease policy further, but a decision is not yet necessary,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “In preparation for the December meeting, the focus will be on the economic outlook and the adequate design of a policy package.”

Most participants in the survey predicted that the emergency program will also be extended, by another six months until the end of 2021. Only one quarter of economists expect an older and less-powerful program of quantitative easing to be bolstered.

The ECB’s injections of cash aim to maintain low borrowing costs for companies and households as well as governments, which have ramped up spending to keep the economy running.

In a sign of the severity of the crisis, a 500 billion-euro increase in the pandemic program would take it to more than twice the original size when it was announced in March.

Latest economic readouts have disappointed. Business activity in the euro area declined in October, raising the possibility of another economic contraction.

France had already warned before Friday’s report that output will probably stall in the fourth quarter, while more than half of Europe’s small and medium-sized businesses said they face bankruptcy in the next year if revenues don’t pick up.

Inflation is core to the ECB’s concerns. The rate turned negative in August and is expected to remain below zero for the rest of the year.

Economists see consumer-price growth averaging just 1.5% in 2023. That’s well short of the ECB’s goal of “below, but close to, 2%” over the medium term -- a target currently under review -- and makes additional stimulus more likely.

“The clouds are darkening over the euro-area economy and the ECB will have to acknowledge that,” said David Powell, an economist at Bloomberg Economics. Lagarde will be “considerably less optimistic than she was in September and clearly signal that the Governing Council is ready to increase the size of the its asset-purchase programs.”

©2020 Bloomberg L.P.