Already pumping cash at a record pace, ECB holds off on big moves for nowAlready pumping cash at a record pace, ECB holds off on big moves for now
European Central Bank (ECB) headquarters building is seen in Frankfurt

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank (ECB) kept much of its remaining powder dry on Thursday, reaffirming its already vast bond purchase scheme but holding back on any big policy move as it is already hoovering up debt at a record pace.

Just weeks after unveiling its biggest stimulus scheme to date, the ECB said it would buy 1.1 trillion euros of debt this year and kept the door open to even more as the euro zone economy is shrinking faster than already depressed expectations.

The bank said it would lower interest rates on its long term loan for banks to as little as minus 1 percent and launch a new loan scheme called Pandemic Emergency Longer-Term Refinancing Operations or PELTROs.

But it did not change its asset purchase programmes, including its new Pandemic Emergency Purchase Programme, also known as PEPP.

“The Governing Council is fully prepared to increase the size of the PEPP and adjust its composition, by as much as necessary and for as long as needed,” the ECB said.

“In any case, it stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.”

With much of Europe locked down indefinitely to contain the coronavirus pandemic, the 19-country currency bloc’s economy could shrink by 10% this year. Governments are borrowing record amounts to keep firms afloat until restrictions are lifted.

The ECB is unlikely to stay on the sidelines for long as it is on track to exhaust its current bond purchase quota by autumn and jittery financial markets are demanding a further show of commitment.

But having acted early, the ECB can afford to wait now and keep some pressure on Europe’s political leaders, who have so far fumbled a fiscal response, leaving the ECB in a familiar role as the currency union’s chief crisis fighter.

By the ECB’s next regular meeting on June 4, the outlines of a broadly agreed deal on a 1 trillion euro reconstruction fund should also be clearer, making it easier for the central bank to do its part.

ECONOMIC HIT

Weak data suggest the ECB cannot avoid doing more: figures earlier on Thursday showed the euro zone economy shrank by 3.8% in the first quarter, underperforming expectations for a 3.5% drop, even before the biggest impact of the lockdown was felt.

Inflation, meanwhile, slowed to just 0.4%, far from the ECB’s target of almost 2%, and a drop into negative territory is likely in the coming months after oil prices crashed.

Attention now turns to ECB President Christine Lagarde’s 1230 GMT news conference, at which investors will be keen to hear whether the ECB discussed bigger asset buys or purchases of bonds that lose their investment-grade ratings in the crisis.

Downgraded by Fitch this week, Italian debt is nearing junk territory, raising the prospect that the bloc’s third-largest economy could lose access to ECB help just as it needs it most.

But letting go of Italy would be politically unacceptable and the ECB has already started to prepare the ground, first by temporarily buying Greek debt and then by accepting bonds recently downgraded to junk as collateral from banks.

Investors will also want to know whether the ECB might allow banks to borrow at even lower rates or grant some non-bank financial firms such as insurance companies access to its funding operations.

With Thursday’s decision, the ECB’s benchmark deposit rate remains at minus 0.5% and its main refinancing rate at 0%.

(Reporting by Balazs Koranyi and Francesco Canepa; Editing by Catherine Evans)