Just a few short months ago, the broader view was that the work of various central banks was done. Key policy rates had been slashed to record lows, and bond-buying programs were boosted to support economies crushed by the global pandemic. Central bankers stood back and closely monitored the economic recovery taking place as businesses reopened and ‘normal’ activity ensued. Then, the second wave hit and parts of Europe have been forced into lockdown again. Although the restrictions are not as extreme as they were earlier this year and businesses and households have learned to adapt somewhat, this is bad news for the U.K. and the Euro Area. Real GDP, after rebounding in Q3, is now expected to contract again in the fourth quarter as November essentially has a sign that says “Sorry, We’re Closed.”
The ECB stayed on the sidelines in late October but President Lagarde dropped not-so-subtle hints that more stimulus was coming in December. Growth risks were “clearly, clearly” tilted to the downside, and at that point, the Governing Council will allow a “thorough reassessment” of the situation with the new macroeconomic projections in hand. And using that updated assessment, the central bank will then “recalibrate its instruments, as appropriate, to respond to the unfolding situation”. As it stands, rates are at record lows, the €1.35 trln PEPP will run until at least the end of June, or until the ECB judges the coronavirus to be over, and the net monthly purchases of €20 bln under the APP will continue for as long as necessary, together with the purchases under the additional €120 bln temporary envelope until the end of the year. We expect that the ECB will, at the December 10th meeting, announce an increase to the PEPP, of at least €150 bln, while emphasizing its temporary nature. Even with the encouraging vaccine news, President Lagarde warned that Europe "could still face recurring cycles" of the viral spread.
The BoE didn’t wait around for its December 17th meeting. Instead, on November 5th, it announced it would add more monetary stimulus by increasing its Asset Purchase Facility by £150 bln to £895 bln, starting in January and running until the end of 2021, with details coming in December. Lest we forget, Governor Bailey has the additional worry of a potential hard Brexit to deal with as the U.K. and the EU have made no progress, at all, on a post-transition trade agreement. This may not be the end: negative rates are still under consideration. However, that tool will likely only be drawn out in case of emergency. If there is a Brexit deal, and the second wave is successfully contained, it will not be needed. At least, that is the hope.
The BoJ has been very, very patient, but Governor Kuroda continues to monitor developments very closely and, as usual, stands ready to do more, “without hesitation”, as needed. The current program of responses to the coronavirus will be extended beyond March 2021, if necessary.