European Central Bank Steps Up Its Stimulus as the Economy Contracts

FRANKFURT — The European Central Bank delivered another dose of stimulus to the eurozone economy on Thursday, warning that the economic crisis caused by the pandemic was likely to linger well into 2022 despite the rollout of new vaccines.

The bank’s Governing Council, which met on Wednesday and Thursday, extended and expanded programs intended to keep borrowing costs low for eurozone businesses and consumers reeling from heightened lockdowns and mounting job losses.

The measures include a de facto money printing program worth more than $2 trillion and an initiative that effectively pays banks to lend money to businesses and consumers.

A second wave of coronavirus cases is causing the eurozone economy to contract again in the final months of the year, Christine Lagarde, the central bank’s president, said during a news conference to explain the rationale behind the decisions.

The most recent data, Ms. Lagarde said, suggests “a more pronounced near-term impact of the pandemic on the economy and a more protracted weakness in inflation than previously envisaged.”

The eurozone will not achieve herd immunity to the virus until the end of 2021, and the economy will not regain its pre-pandemic strength until the middle of 2022, central bank economists said on Thursday.

Even after vaccines render most people immune, the European Central Bank will need to keep pumping money into the eurozone to push up chronically low inflation, economists say. Consumer prices fell at an annual rate of 0.3 percent in November and are not expected to begin rising until sometime next year.

The central bank is supposed to keep inflation close to 2 percent, but even it does not expect to hit that target anytime soon. The bank forecast on Thursday that inflation would be 1.4 percent in 2023.

“They will have to do more even when the pandemic has run its course,” said Florian Hense, an economist at Berenberg bank in London.

As part of its effort to stimulate the economy, the European Central Bank said Thursday that it would increase pandemic-related bond buying — essentially a money-printing program — by 500 million euros, to a total of €1.85 trillion euros, or $2.2 trillion. The bank said it expected to continue the purchases at least until March 2022, nine months longer than planned.

The bond buying is a way to push down market interest rates to keep borrowing costs low.

The central bank also extended by a year, to June 2022, an initiative that allows commercial banks to borrow money at negative interest rates, provided the banks pass the credit on to their customers.

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With rates as low as minus-1 percent under certain conditions, the central bank is in effect paying lenders to take the money as a way of pumping credit into the economy.

The new burst of stimulus was not a surprise after Ms. Lagarde telegraphed policymakers’ intentions at a news conference in October, and repeated the message several times afterward.

The central bank’s action on Thursday ensures that borrowing costs in the 19 countries of the eurozone will remain exceptionally low for the foreseeable future, making it much easier for governments to finance aid programs for stricken citizens and businesses. Bonds issued by Spain and Portugal, which were once considered high risk, hit record lows of nearly zero percent Thursday.

The eurozone economy rebounded sharply in the third quarter of this year, but is shrinking again after a surge in coronavirus cases prompted the bloc’s governments to reimpose curfews, bans on indoor dining and other lockdown measures.

The burden has been particularly heavy for restaurants, hair salons and other businesses that depend on personal contact. “The service sector is still bearing the brunt,” Ms. Lagarde said.

The pandemic is not the eurozone’s only problem. Negotiations with Britain about its exit from the European Union are deadlocked, increasing the risk of a disorderly breakup.

In addition, the euro has been gaining strength against the U.S. dollar, trading at $1.21 Thursday. That is a threat to Europe because products from countries like France, Germany and Italy become more expensive when purchased with other currencies. A strong euro also makes it harder for the central bank to hit its inflation target because prices for imported goods fall.

Ms. Lagarde addressed the exchange rate issue gingerly because central bankers have agreed among themselves not to provoke currency wars. The European Central Bank, she said, will “continue to monitor developments.”

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