ECB announces €750 billion in additional stimulus

The ECB announced a new €750 billion stimulus package this week. In an emergency meeting on Wednesday, the central bank decided to buy even more bonds from governments and companies. The central bank also announced in a note that it is easing the requirements for the bond-buying program. If necessary, the central bank is prepared to further expand its asset purchase program, even if that means exceeding self-imposed limits.

The new buy-back program, called Pandemic Emergency Purchase Programme (PEPP), comes on top of the measures taken by the central bank last week Announced. At that time, the ECB announced that it would buy €120 billion worth of bonds per month. The additional €750 billion from this new contingency plan brings the total planned purchases for this year to €1.1 trillion. The new program will remain active at least until the end of this year, with the option to extend it if the situation calls for it.

Italian interest rate

The ECB was more or less forced to take action this week. The interest rate on government bonds of the southern euro countries shot up after earlier statements by Christine Lagarde. The governor of the central bank said during the interest rate decision last week that she does not intend to narrow interest rate differentials between countries. This caused turmoil in the bond market, particularly in Italy, which was hit hard by the coronavirus. Italy's 10-year yield shot up to almost 3% as a result of Lagarde's statements. After the announcement of this new stimulus program, interest rates fell just as sharply.

With the announcement of this new bond-buying program, the central bank is making a 180-degree turn. At first, Lagarde said that she does not intend to eliminate the difference in interest rates between different countries, but now she is doing the exact opposite. Unlike the regular bond-buying programme, the central bank can temporarily deviate from the normal distribution key under this new programme. This means that it can temporarily buy more bonds from a particular country than the allocation key allows.

Yields on government bonds fall again after announcement of ECB emergency programme (Source: Reuters)

This contribution comes from Geotrendlines