European Central Bank building, Frankfurt am Main, Germany. Image source: Thomas Becker © 123RF.com
The Governing Council of the European Central Bank met earlier today to deliberate on the current stance of its monetary policy. Expectedly, the Council decided to preserve the already near-negative interest rate unchanged at 0.00 per cent.
What was more surprising, however, was the decision of the Council to increase the scope of its asset-purchasing programs – chiefly, the envelope of its pandemic emergency purchase program (PEPP).
"The envelope for the pandemic emergency purchase programme (PEPP) will be increased by €600 billion to a total of €1,350 billion. In response to the pandemic-related downward revision to inflation over the projection horizon, the PEPP expansion will further ease the general monetary policy stance, supporting funding conditions in the real economy, especially for businesses and households. […] The horizon for net purchases under the PEPP will be extended to at least the end of June 2021."
Essentially, the ECB would be scaling up the breadth of its short-term asset-purchasing programs in addition to raising their deadlines past the initially planned dates.
ECB's announcement comes just days after the EU Commission decided to ramp up its fiscal policy in a bid to ensure more stable recovery through this comprehensive relief package.
The decision of the Council to make its underlying monetary policy even more accommodative is provoked by the almost negative inflation that is currently weighing down on the Eurozone's economy.
Eurozone Inflation Rate. Image source: TradingEconomics.com
The ECB is stepping up on the throttle pedal with the intention of improving the price stability of the European financial markets by flooding them with even more liquidity.
In the short-term, such actions are probably going to have an overwhelmingly positive impact on the recovering economy of the Eurozone.
ECB's bolstered funding would likely offset some of the negative spillovers from the uncertainty that continues to plague the financial markets, as the healthcare crisis continues to pose considerable risks for the ongoing recovery.
However, the decision could also backfire in the longer-term, as this massive liquidity could overheat the growth process in the third quarter if the loose monetary policy is not handled carefully.
A worst-case scenario would be one, in which inflation skyrockets out of ECB's control in a relatively short period of time.
Meanwhile, ECB's decision was met with mixed feelings on the market.
The EURUSD is currently in the process of establishing what looks like a shooting star candle on the 4H chart, which could be an early precursor for the establishment of a bearish correction within the context of the broader bullish trend.
As can be seen, the MACD has already formed a bearish crossover, as selling pressure continues to increase.
EURUSD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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