The European Central Bank (ECB) could increase the size of its purchase program to help the economy in the event of a COVID-19 pandemic. The ECB finds itself in a familiar position as the main savior of the euro, once again called upon to push its limits while politicians are bickering.
24 April, 2020 | AtoZ Markets – ECB will increase the purchase of emergency bonds in the coming months to intensify support for the economy. According to President Christine Lagarde, the economy could contract by 15% this year. One in four respondents expects the ECB to increase the size of its pandemic purchasing program to help the economy, when the Governing Council holds a scheduled political meeting. Most see it happen by September.
ECB policymakers from all over the region have pledged to step up stimulus measures if necessary. At an unscheduled meeting on Wednesday, they agreed to temporarily accept certain “junk-rate” debts as collateral. It is to ensure that lenders continue to have access to the central bank’s generous lines of liquidity.
Survey participants do not expect the ECB to continue to push interest rates below zero. The deposit rate is already at a record low of -0.5%. Policymakers have expressed concern that a further reduction would hamper the supply of credit.
Indecisive EU to Force ECB Into More Emergency Action
EU leaders agreed overnight to create a € 1 trillion emergency fund to support recovery from the coronavirus crisis that crippled the economies. To save governments time, the ECB will need to further extend its stimulus measures, distorting and circumventing central bank rules. ECB needs to open the door wider for political and legal opponents.
The ECB unveiled a shocking 750 billion euro bond purchase plan. Many expect it to have to act again, perhaps as soon as Thursday. Italy’s public debt should reach at least 175% of national production following the crisis, which raises fears that its credit ratings will be downgraded to “junk”. This would make the country’s bonds ineligible for purchase by the ECB, thereby removing the largest buyer from the market and breaking the balance sheets of Italian banks. Former ECB vice-president Vitor Constancio said:
“The main disappointment is not that they need more meetings to reach a solution that is up to the crisis. It is because the EU Council could not agree on any principle or guidance concerning the Recovery Fund. Nothing on the size, the funding or the rules of distribution”.
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