European Central Bank (ECB) decided to keep interest rates this April 2020. However, they are ready to add stimulus programs if needed to overcome the severe crisis caused by the pandemic. The ECB also announced that they had relaxed the loan terms for banks.
The ECB policy was announced in conjunction with the release of data showing that 19 Eurozone member countries contracted GDP to a level of -3.8 percent in the first quarter of 2020. That level was the lowest since 1995. The reason is clearly due to business activities that have been hit since the lockdown policy was implemented to limit the spread of Coronaviruses.
"The Eurozone is facing a large-scale and rapid economic contraction, which has not had a precedent before," ECB President Christine Lagarde said at a press conference on Thursday (30 / April) evening. He added that the central bank's expectations of further Eurozone GDP reached 5 percent and 12 percent this year.
As for the stimulus, Lagarde said it was ready to continue or even add if needed. The ECB is launching a stimulus package to mitigate economic shocks. Last March, 750 billion euros was poured into a package of government bonds called the Pandemic Emergency Purchase Program (PEPP).
EUR / USD Skyrocketed As The US Dollar Weakens
Based on data released in early April, if the ECB continues to buy bonds at the same rate as now, the program will reach a limit sometime in October. "This purchase (bond) will continue to be done flexibly within a certain time, between asset classes, and across jurisdictions," Lagarde said.
Shortly after the announcement of the ECB's monetary policy, the Euro weakened against the US Dollar. The reason, the ECB announcement was considered disappointing by investors who had already expected expansion of bond purchases into junk bonds, as part of its quantitative easing program.
However, when this news was updated on Friday (01 / May) morning, the pair had skyrocketed. EUR / USD traded at 1.0944, after having risen 0.70 percent a few hours earlier. The US dollar weakened because of the rise in the Euro, and the portfolio rebalancing at the end of the month by investors.
The euro slumped near record lows of one month versus the US Dollar is trading today (24 / April). European Union leaders reached an agreement to design an emergency fund worth 1 trillion euros but did not discuss further details. Meanwhile, analysts predict the European Central Bank (ECB) will further ease monetary policy by increasing the scale of its bond purchase program soon.
Launch of Emergency Fund for Corona Impact Recovery
In yesterday's meeting, EU leaders agreed to launch an emergency fund of 1 Trillion Euros to help recover from the effects of the Coronavirus pandemic. However, further details will only be discussed in the summer.
Outside the forum, French President Emmanuel Macron revealed that there were still differences of opinion among EU member states as to whether the funds would be in the form of aid or loans. He implies that the gap between rich and fragile countries in the European Union is still sharp which threatens the region's political unity.
"There is a risk that a concrete decision regarding the creation of a recovery fund may not appear before September, so it cannot be used before early 2021," Alain Durre of Goldman Sachs said in a note released by Reuters. Chris Weston from Pepperstone expressed a similar opinion.
"We don't know how these funds will be spent, and this is not a remedy to stop the 15% contraction in future GDP." Meanwhile, the results of a Bloomberg survey said that one in four economists predicted the ECB would increase the scale of its bond purchase program at a policy meeting next week. However, most survey respondents consider that the scale-up of the program will only take place in September.
