ECB to ‘recalibrate’ stimulus tools as pandemic deepens

FRANKFURT: The European Central Bank committed on Thursday to take new action to contain the growing fallout from a second wave of coronavirus infections, saying it would hone its response by the time of its December meeting.

While the bank's Governing Council left policy unchanged this time around, it was the clearest hint yet of more stimulus to come as new national lockdown measures make a double-dip recession increasingly likely for the euro zone economy.

"We agreed, all of us, that it was necessary to take action and therefore to recalibrate our instruments at our next Governing Council meeting," ECB President Christine Lagarde told a news conference.

"The teams, committees, staff ... are already at work to do this recalibration exercise," she said, adding it "will touch on all our instruments" and would cover the scope, duration and volume of all its appropriate measures.

Lagarde repeated several times that risks to the region's recovery were "clearly tilted to the downside" and heavily dependent on the success of efforts to contain a new wave of infections threatening to overwhelm Europe this winter.

The bloc's biggest economies, Germany and France, announced new lockdowns overnight. Others among the 19 countries that use the euro are also shuttering much of their services sectors, a blow to the fledgling recovery.

The ECB has set aside 1.35 trillion euros for bond purchases until mid-2021 and still has 700 billion euros of that to spare.

Buying roughly 100 billion euros ($118 billion) of debt a month, it has already pushed borrowing costs to record lows, and even the spread between the borrowing costs of euro zone members is back to its pre-crisis levels.

But there are clear limits to its powers and Lagarde stressed there should be no delay to the European Union's 750 billion euro recovery fund and affirmed her view that monetary policy should be complemented by massive government support.

"An ambitious coordinated fiscal stance remains critical," Lagarde said, adding that she would not be surprised if individual governments offered more fiscal support given the worsening conditions.

DEEPENING GLOOM

The ECB's problem is that fresh COVID-19 restrictions are challenging its view that the euro zone economy will grow back to its pre-crisis level by the end of 2022.

Inflation expectations, the ECB's main worry, are also declining. While the threat of deflation is not yet back on the agenda, inflation may fall short of the ECB's target of nearly 2% for many more years to come.

Under France's new measures, people must mostly stay at home and can go to work only if their employer deems it impossible for them to do the job remotely. Schools will stay open.

Germany, whose economy was already losing steam, will shut bars, restaurants and theatres in November, though schools will stay open and shops will be allowed to operate with strict limits on access.

Spain, one of Europe's worst COVID-19 hotspots, where the government is planning to announce a six-month state of emergency, may already be back in recession, while Italy has also unveiled new restrictions.

Lagarde said that how the virus is managed between now and the end of the year would determine what side of zero the fourth-quarter growth number falls on.

"The ECB was there for the first wave, the ECB will be here for the second wave," she said.