The European Central Bank injected a further €500 billion ($604bn) in monetary stimulus on Thursday to help shore up the eurozone economy that has been devastated by the Covid-19 pandemic.
The decision by the 25-member governing council to boost the ECB’s Pandemic Emergency Purchase Programme (PEPP) takes the total stimulus to €1.85 trillion, as the bank looks to keep financing conditions loose through the health and economic crisis.
The ECB said the monetary policy measures will contribute to preserving favourable financing conditions during the pandemic by “supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability”.
ECB president Christine Lagarde said that while news of progress in developing coronavirus vaccines “is encouraging”, the economy still faces risks and that “uncertainty is high".
"Overall, the risks surrounding the euro area growth outlook remain tilted to the downside, but have become less pronounced. While the news about the prospects for vaccine rollouts in the near future is encouraging, downside risks remain related to the implication of the pandemic for economic and financial conditions," she said on Thursday.
The eurozone's economy grew at the fastest rate since records began in the third quarter of this year, with employment also rebounding from a record contraction caused by the pandemic earlier this year.
Consumer spending and rising exports contributed to the resurgence, according to Eurostat, as gross domestic product (GDP) in the 19-country bloc increased by 12.5 per cent in the July-September period from the second quarter, the largest rise since the agency began collecting data in 1995.
Ms Lagarde said the eurozone's pandemic-induced recession is expected to be less severe than in 2020 with a contraction of 7.3 per cent, but next year's rebound will be smaller than forecast as the crisis continues to weigh on output.
GDP is expected to expand by 3.9 per cent next year, slower than its September forecast of 5 per cent, and 4.2 per cent in 2022, which beats its earlier expectation of 3.2 per cent, Ms Lagarde said. In its first projection for 2023, the ECB is pencilling in growth of 2.1 per cent.
However, with new lockdowns hammering the economy, vaccines only just arriving and Brexit talks on a knife-edge, the outlook is still very uncertain.
European Union and British leaders gave themselves until the end of the weekend to seal a new trading pact, with some $1tn in annual trade at risk of tariffs if they can't reach a deal by December 31, when the Brexit transition period ends.
The ECB also kept interest rates unchanged at record lows, although it pledged to cut them further if necessary. The ECB's deposit rate now stands at minus 0.5 per cent, while the main refinancing rate is unchanged at 0 per cent.
The regulator also extended the period during which banks will get a rebate rate on their Targeted Longer-Term Refinancing Operations (TLTRO) by one year to June 2022.
The move did not surprise analysts as the ECB has made it clear for weeks that more easing was imminent and that bond purchases, along with liquidity facilities for banks, would form the backbone of any policy response.
Andrew Kenningham, chief Europe economist at Capital Economics, said the main policy changes underline the ECB’s commitment to using its balance sheet well beyond the end of the health emergency in order to keep bond yields exceptionally low.
"The extension of the commitment to make net asset purchases by nine months, to at least March 2022, and the commitment to extend the reinvest of maturing principal payments by a year, to December 2023, were probably a little longer than most anticipated," he said.
Ms Lagarde said depending on how well the economy recovers, the ECB may not use all of its latest stimulus boost.
“If favourable financing conditions can be maintained with purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” Ms Lagarde said. “Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.”
Financial markets have already started to price in a post-pandemic recovery, with global stocks hitting an all-time high earlier this week and the euro scaling a 30-month high against the dollar at $1.2177.
“The ECB left the gunpowder dry and no bazooka was fired,” said Naeem Aslam, chief market analyst at Avatrade.
“This has made investors bullish on the euro as the expectations were that the ECB is worried about the economic recovery. Clearly, the decision shows that the ECB is confident with current measures, which is massively positive for the markets. Euro traders have taken the big guns out and they are going bullish on the euro.”