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ECB Extends PEPP, APP and TLTROs to At Leaset Until Mid-2022

As promised, the ECB “recalibrated” the existing monetary policy measures at the December meeting. The aim is to ensure that the current level of stimulus remains in presence through to 2020. On the economic projections, the staff revised lower the GDP growth forecast for 2021 but higher for 2022. Inflation forecasts were downgraded quote significantly.

On the monetary policy, ECB increased the size of the Pandemic Emergency Purchase Program (PEPP) by 500B euro to 1850B euro so that net purchases will last at least until March 2022. Reinvestments of the principal payments from the purchases will run at least until the end of 2023. The central bank also tweaked the Asset Purchase Program (APP), its traditional QE program, to a monthly purchase to 20B euro. This will last until inflation moves back to the target. Policymakers also made adjustment on the long-term refinancing operations. Targeted longer-term refinancing operations (TLTROs) will be extended by 12 months until June 2022, and the amount banks can get from the ECB was increased to 55% of the eligible loan stock, from the current 50%. President Lagarde noted that extension of the TLTROs is designed “for banks to sustain the current level of bank lending” through the recovery phase. Accompanying the extension, the collateral framework is relaxed until June 2022. Meanwhile, pandemic emergency longer-term refinancing operations (PELTROs) will continue through to 2021, with 4 operations. As widely anticipated, the policy rates stayed unchanged. All policy rates have been staying negative for years.

On the economic outlook, the staff projected that GDP to contract -7.3% y/y this year, better than September’s estimated of -8%. Growth next year will be +3.9%, down from +5% in September. Lagarde reiterated that the recovery remains uncertain and incomplete. Thanks to vaccine developments, the central bank upgraded the growth forecast to +4.2% for 2022, from +3.2% previously. For the first time, the central bank revealed its GDP growth projection for 2023 at +2.1%. Subdued inflation pressure will likely take longer to recover. As suggested in the updated projections, core CPI is revised lower this year through to 2022. Core CPI is projected to reach +0.7% this year and only improve to +1.2% in 2023. Headline CPI is downgraded to +0.2% y/y this year, from +0.3% estimated in September. The central bank also downgraded the headline reading for 2022 to +1.11% from +1.3% previously.