ECB unleashes $600 billion in new stimulus to prop up Europe's economy

London(CNN Business) The European Central Bank is expanding its huge money-printing program by hundreds of billions of euros, an attempt to prop up the economy as another wave of coronavirus rips through the region and threatens to derail its fragile recovery.

The central bank said in a statement on Thursday that it would increase its asset purchases by €500 billion ($605 billion), bringing the total stimulus program to €1.85 trillion ($2.24 trillion). It also plans to extend purchases to at least the end of March 2022 and grant more subsidized loans to banks to stimulate lending.

"The monetary policy measures taken today will contribute to preserving favourable financing conditions over the pandemic period, thereby supporting the flow of credit to all sectors of the economy, underpinning economic activity and safeguarding medium-term price stability," the statement said.

At a press conference, ECB President Christine Lagarde said that the pandemic continues to pose "serious risks" to European economies and that renewed lockdowns heighten the risk of a delayed recovery.

While manufacturing is holding up well, services activity has been "severely curbed" by an increase in infection rates and new restrictions, she added. "An ample degree of monetary accommodation is necessary to support economic activity," she said.

The ECB said that "uncertainty remains high" with regards to the development of the pandemic and the timing of vaccine distribution, and it therefore stands ready to adjust its tools to ensure inflation, which is currently in negative territory, moves towards its 2% target.

The bank left its deposit rate unchanged at minus 0.5% and Lagarde said she expects interest rates to remain at current or lower levels until the inflation outlook improves.

"While the main policy changes announced today were largely as expected, they underline the ECB's commitment to using its balance sheet well beyond the end of the health emergency in order to keep bond yields exceptionally low," said Andrew Kenningham, chief Europe economist at Capital Economics.

This is the second time that the ECB has expanded its Pandemic Emergency Purchase Program (PEPP), which it rolled out in the spring as the coronavirus swept across Europe and governments imposed tight restrictions on economic activity. In June, it increased the size of the program by €600 billion ($726 billion).

Despite a record rebound in the third quarter, the EU economy remained 4.2% smaller than its September 2019 level, according to statistics agency Eurostat. Europe is now battling another surge in coronavirus cases, prompting fresh lockdowns in major economies such as Germany, France and Italy. And GDP is expected to contract again in the fourth quarter.

"The second wave of the pandemic and the associated intensification of containment measures are expected to result in a renewed significant decline in activity in the fourth quarter, although to a lesser extent than the second quarter," Lagarde said.

EU needs recovery fund 'without delay'

The central bank's move comes as a dispute between EU member countries threatens to delay the release of €800 billion ($969 billion) in funds designed to speed the region's recovery from the pandemic. EU leaders meeting this week in Brussels are seeking to negotiate a compromise that would end the standoff initiated by Poland and Hungary over attempts to link payouts to respect for the rule of law.

On Thursday, Lagarde stressed the importance of the recovery fund becoming operational "without delay" and called on EU member countries to deploy the funds for "productive public spending."

A delay in payments to badly damaged economies including Spain, Italy and Greece would delay their recoveries and dampen the benefits that are expected to arise from the widespread rollout of vaccines, Bert Colijn, senior eurozone economist at ING, told CNN Business this week.

The International Monetary Fund expects Europe's economy to shrink by 7% in 2020, a sharper decline than the United States, but less severe than the United Kingdom.