ECB substantially expands asset purchase programme

Late on Wednesday evening (18 March), the European Central Bank (ECB) made the surprise announcement that it would increase its purchases of securities. An additional purchasing volume of €750 billion is planned under the new Pandemic Emergency Purchase Programme (PEPP).

ECB: Will do “everything necessary”

The ECB is taking this step to tackle the economic fallout of the coronavirus pandemic. The ECB Governing Council emphasised that it would do “everything necessary” and, if required, would adjust the size, duration and composition of the programme. It also said that it would explore all options to support the eurozone’s economy through the shock created by coronavirus.

Details of the steps decided upon:

  • €750 billion increase in bond purchases, both government and corporate bonds

  • All paper that is currently eligible for purchase will also be eligible under PEPP

  • Allocation of government bond purchases to be generally determined by the capital key, but with greater flexibility

  • Programme will continue for as long as needed, and in any case until the end of 2020

  • Relaxation of investment restrictions under the Corporate Sector Purchase Programme (CSPP) and expansion of the range of paper eligible for purchase

  • Easing of the collateral standards for commercial Banks 

The ECB also explicitly emphasised its commitment to “playing its role in supporting all citizens of the euro area through this extremely challenging time”. It would therefore ensure that families, firms, banks and governments can benefit from supportive financing conditions that enable them to absorb this shock. If “self-imposed limits” were to run counter to achieving this objective, the ECB would consider revising them.

Substantial increase in support

This package of measures represents a substantial ramping up of its current efforts. ECB President Christine Lagarde has now significantly expanded the size and scope of the support announced in recent weeks. Moreover, the central bank’s words underline its determination even more clearly. This decision was clearly aimed at securing the trust and confidence of the public, governments and financial markets. The steps are therefore reminiscent of Mario Draghi’s “whatever it takes” promise, and not just in the choice of words.

We at Union Investment believe that the decisions and the emphasis on the ECB’s determination are the right approach. However, the resolution on PEPP is unlikely to bring a sustained period of calm to the capital markets. In our view, this would primarily require a significant worldwide slowdown in the number of infections. At the same time, though, we believe that both the real economy and the financial sector will benefit from it going forward. The decisions made last night are therefore a key element in effectively tackling the economic fallout of coronavirus. Consequently, we continue to believe that the outlook for the capital markets is constructive in the medium to long term.

 

As at 19 March 2020