what to expect in December after hint of more stimulus

Christine Lagarde, president of the European Central Bank (ECB), speaks during a live stream video of the central bank’s virtual rate decision news conference.

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LONDON — More bond purchases, lower costs for banks and even changes to interest rates — the European Central Bank could go all in at its December meeting, as the euro area grapples with a second wave of the coronavirus.

The central bank hinted on Thursday that it would consider implementing more monetary stimulus in December. The announcement followed decisions in France and Germany to impose new national lockdowns — draconian measures that led to major economic contractions earlier this year and threaten further economic pain.

“ECB President Christine Lagarde sent a crystal-clear message that: further stimulus will be announced in December, and there will be a package of measures,” Marco Valli, head of macro research at UniCredit, said in a note.

In the wake of the pandemic, the ECB launched a new government bond purchase program in an effort to bolster the region’s economy in the face of the coronavirus pandemic. Its Pandemic Emergency Purchase Programme, or PEPP, is due to last at least until June of 2021 and totals 1.35 trillion euros ($1.51 trillion).

At least four analysts expect this program to be extended in duration and size at the December meeting —  and they think the ECB will go even further.

“A boost and extension of the PEPP is now a done deal, and we also see a high likelihood that the current favorable terms of TLTRO (targeted longer-term refinancing operations) … will be extended,” Valli said, in reference to the borrowing conditions offered to banks.

Lower borrowing costs for banks

Earlier this year, the ECB decided to make lending more attractive for commercial banks as a way to boost the real economy. The idea is that banks are encouraged to provide loans to small businesses, for instance, with the latter then likely to reinvest that money, expand and hire more people.

As part of the ECB’s scheme, the more loans commercial banks issue to households and non-financial firms, the more attractive the interest rate will be when they borrow from the central bank.

Florian Hense, economist at Berenberg, also suggested that “the ECB could lengthen the period during which it offers currently the lowest lending rate of -1%” as part of its December package.

In addition, the ECB could also allow banks to re-price existing loans to the lowest lending rate of -1%, rather than offering the most favourable rate only for new lending, Hense added.

More government bonds

Prior to the Covid-19 outbreak, the ECB was already trying to boost the euro zone economy with regular government bond purchases. The Public Sector Purchase Program (PSPP) continues as another tool to prop up the region’s economy, made up of 19-member states.

More radical, and earlier, action is also possible.

Andrew Kenningham

chief Europe economist at Capital Economics

Some analysts are now expecting this bond purchase program to also be extended, in addition to PEPP.

Claus Vistesen, economist at Pantheon Macro, estimated a 150 billion euro increase to this scheme, which “likely will be added over 12 months through end-2021.”

And a rate cut?

The ECB has been on a path of low interest rates since the sovereign debt crisis, having announced its first more into negative territory in 2014. Negative rates are also a monetary policy tool, which aim to support bank lending and prop up the real economy.

“Interest rate policy is probably the trickiest part of the package,” Valli from UniCredit said.

“Entering today’s meeting, we thought that a cut of the deposit rate would not be on the ECB’s agenda for some time … We have not changed our view for now, but Ms. Lagarde’s words today do increase risks to our forecast,” he said in a note on Thursday.

The ECB’s main refinancing operations, marginal lending facility and deposit facility remain at 0%, 0.25% and -0.5%, respectively.

Hense from Berenberg also said that “a cut in the deposit rate below the current -0.5% seems less likely.”

But given how severe the economic situation is, the ECB could even act sooner.

“More radical, and earlier, action is also possible,” Andrew Kenningham, chief Europe economist at Capital Economics, said in a note.

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