ECB Keeps Stimulus Steady as Economy Grapples With Longer Curbs

ECB Keeps Stimulus Steady as Economy Grapples With Longer Curbs”

With more than a trillion euros of pandemic stimulus still in the pipeline, President Christine Lagarde is expected to underline Thursday that the bank has the means keep credit affordable and support the hoped-for recovery. At a press conference following the decision, European Central Bank president Christine Lagarde said new cases and restrictions "have likely led to a decline in activity in the fourth quarter of 2020 and are also expected to weigh on activity in the first quarter of this year".

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

Europe's top economy Germany this week extended its partial lockdown until February 14, and Chancellor Angela Merkel has not ruled out border checks to slow the spread of the new strains.

Lagarde will hold a virtual press conference at 2:30 p.m. Frankfurt time, where she's likely to be quizzed on her recent remarks that the economic projections her institution produced in early December - including 3.9 per cent growth this year - are still valid.

That said, Mrs Lagarde struck a less than cautiously optimistic tone today, acknowledging that uncertainty remains high and the intensification of the pandemic poses some downside risks to the short-term economic outlook, in turn warranting ample monetary stimulus as well as ambitious and coordinated fiscal response. The ECB's decision not to adjust its key programmes was largely expected because it added a major dose of stimulus only last month, at its December 10 meeting.

France and Spain have tightened their evening curfews, while non-essential shops are closed across much of the continent. And she stressed there were a number of "positives" including the rollout of vaccines, the Brexit deal, and the agreement of the €750 billion European Union recovery fund.

The ECB said on Thursday that the total envelope need not be used in full if "favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP", but added that the envelope can also be recalibrated to maintain favorable financing conditions and counter pandemic shock.

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I would argue that she would adopt a similar stance as what Powell outlined last week, in that the European Central Bank will brush aside any likely temporary jump in inflation readings this year until there is more clarity that such pressures can be sustained in the long run.

Yet Vistesen noted that Lagarde also said the European Central Bank could expand the PEPP if necessary.

She confirmed that the ECB's near-term forecasts were supported by the newest data, stating: "Overall, the incoming data confirm our previous baseline assessment of pronounced near term impact on economy and protracted weakness in inflation".

The scheme, aimed at keeping borrowing costs low to encourage spending and investment, was also prolonged until March 2022.

The bank has also offered ultra-cheap bank loans and held interest rates at historic lows.

The euro was up 0.3% against the dollar in the wake of the decision, to $1.214.

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