Lagarde Primes ECB for More Economic Stimulus
(Bloomberg) -- European Central Bank President Christine Lagarde said there is “little doubt” that policy makers will agree on a new package of monetary stimulus in December as coronavirus infections and renewed lockdowns threaten a double-dip recession.
The comment to reporters, after policy makers agreed to keep their stimulus settings unchanged for now, highlights how the resurgent disease has derailed the region’s upturn.
“The euro-area economic recovery is losing momentum more rapidly than expected,” Lagarde said in a press briefing on Thursday. “We agreed that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting.”
The euro dropped to the low of the day and European stocks climbed on the remark.
Officials kept the pandemic bond-buying program at 1.35 trillion euros ($1.6 trillion). But the president signaled that the next step could be broader than just ramping up that program, saying staff are already working on policy options, and “I’m not ruling out any of the tools that we have.”
What Bloomberg Economics Says...
“The Governing Council didn’t have to act today -- it has already approved enough asset purchases to tackle whatever economic deterioration materializes between now and the end of the year. The ECB has about 800 billion euros in firepower beyond what it was poised to use for the remainder of 2020.”
-- David Powell and Maeva Cousin, euro-area economists
For the full note, click here.
“The market will be expecting quite a lot for December,” said Anatoli Annenkov, an economist at Societe Generale. Thursday’s message “was very clear, unusually clear in pre-announcing action, which is not normally what the ECB does.”
While policy settings might not change until December, Lagarde pledged to use the full flexibility of the bond program, saying that “in the meantime we are not going to just stand still.” That signals purchases could be accelerated. Only half the program has so far been used.
She also suggested policy makers could take further steps in the interim if needed, arguing that “if we have to meet on short notice, we will do so. We stand ready for that.”
New coronavirus lockdowns announced by Germany and France in the past 24 hours have highlighted how the euro area’s outlook has darkened considerably since the ECB’s September meeting. The summer rebound has given way to a possible double-dip recession, forcing governments to provide more aid and pressuring the central bank to keep borrowing costs low.
Even before the new restrictions, euro-area services were shrinking, and confidence measures have slipped. That’s put pressure on both the ECB and governments to ramp up support and protect millions of jobs and businesses.
Lagarde stressed the need for regional fiscal aid to be implemented and delivered, rather than just planned. That’s after EU governments have been stuck in negotiations with the European Parliament over outstanding details of the region’s recovery fund, raising doubts about whether the first slice of funds can be distributed in the first half of 2021 as scheduled.
In terms of monetary support, economists predicted before Thursday’s decision that the ECB would add 500 billion euros to its bond plan in December. At that point, uncertainties including the outcome of Brexit discussions and the U.S. election might become clearer, and policy makers will have a better overview of the effects of containment measures.
More economic data on Friday are likely to show prices falling and unemployment elevated. There will also be a strong reading for third-quarter gross domestic product, which will serve only to highlight how the recovery that took place after lockdowns ended is now over.
“The question is whether the coming support from the ECB -- likely to be 6 weeks away -- is enough tailwind when compared to the headwinds in the interim,” said Andreas Billmeier, Sovereign Research Analyst at Western Asset Management in London. “The ECB has shown in spring that it can act decisively if market conditions deteriorate rapidly.”
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