ECB holds rates and stimulus steady as it assesses recession risk

 ECB holds rates and stimulus steady as it assesses recession risk

The European Central Bank left its policy unchanged on Thursday as it assesses whether last month’s stimulus boost will be enough to support a recovery in the eurozone economy, which is suffering from the latest coronavirus-related lockdowns.

The resurgence of the virus and restrictions to control it are widely expected by economists to plunge the 19-country bloc into a double-dip recession this winter; the slow pace of vaccinations also threatens to postpone the expected economic recovery.

The ECB’s decision came six weeks after the central bank expanded its emergency bond-buying programme to €1.85tn and added €300bn to the ultra-cheap loans it provides to banks while extending them both well into next year.

The ECB said it had “decided to reconfirm its very accommodative monetary policy stance”.

Repeating a shift in its policy stance that was announced last month, it added that emergency bond purchases would be “conducted to preserve favourable financing conditions over the pandemic period” and the €1.85tn may not be used in full or could be increased further if needed.

In a press conference after the policy meeting, ECB president Christine Lagarde said “uncertainty remains high” and the latest coronavirus restrictions meant there were “downside risks to the short-term economic outlook”.

Ms Lagarde said the ECB’s expansionary policy aimed to “prevent a tightening of financial conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.

Florian Hense, an economist at Berenberg, said earlier on Thursday that the ECB was “in wait-and-see mode” while it was “still taking stock” of the impact of the latest stimulus measures.

Widely watched alternative data indicators suggest the escalating coronavirus restrictions have significantly slowed economic activity across the eurozone since the start of this year. Travel to retail and hospitality venues and workplaces, as well as consumer confidence and spending, have all taken a hit, according to high-frequency activity trackers that offer a more timely gauge of the economy than official statistics, although they are less comprehensive and reliable.

Eurozone inflation was negative in December for the fifth consecutive month and economists doubt the ECB’s ability to reach its target of just below 2 per cent — something it has failed to do for most of the past decade. The euro’s recent rise against the US dollar to its highest level for almost three years is weighing on prices by lowering the cost of imports.

“Underlying price pressures are expected to remain subdued due to lower demand, notably in the travel and tourism sectors,” Ms Lagarde said, adding that market-based inflation expectations had increased slightly but remained low.

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