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ECB sticks with euro zone stimulus plans

The European Central Bank left policy unchanged as expected today, keeping copious stimulus flowing even as it saw reasons to expect a firm rebound of the euro area economy this year.

The ECB is keeping borrowing costs pinned near record lows via massive bond purchases to see the 19-country currency bloc through a scarring recession that has kept schools, shops, restaurants and hotels closed for most of the last year.

But growth is expected to rebound quickly from mid-year as Covid-19 infections are brought under control, the pace of vaccination picks up and restrictions are removed, raising questions about just how much ECB help is still needed.

“There are clearly signs of improvement,” President Christine Lagarde told a news conference today.

“Progress with vaccination campaigns and an envisaged gradual relaxation of containment measures underpin expectations of a firm rebound in economic activity in the course of 2021,” she added.

She stressed the overall situation was still “clouded with uncertainty”, however.

This was due to factors including the possible spread of new virus variants to risks to financing conditions and continued pressures on struggling sectors of the economy.

The ECB’s decision to keep rates unchanged as widely expected sets the stage for a battle at the June 10 meeting, when policymakers have to decide whether to slow bond buying, even if that means allowing borrowing costs to drift higher.

In March, policymakers agreed to step up purchases this quarter. They will revisit that decision in June, with some already calling for a reduction in the third quarter.

“The Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” the ECB statement said, repeating guidance from March.

Christine Lagarde was asked repeatedly at the news conference to elaborate on the timetable and debate around any future tapering but stressed any decision would be “data-dependent”.

“On the occasion of this Governing Council, we did not discuss any phasing out of PEPP because it is premature,” she said.

At the current pace, the ECB is likely to exhaust its purchase quota before the scheduled end to its Pandemic Emergency Purchase Programme next March.

The June decision will thus give a crucial signal of whether the €1.85 trillion PEPP can be wound down early next year.

Dutch policymaker Klaas Knot, one of the most conservative members of the Governing Council, has already said it may be possible to start winding down purchases from June.

Other policymakers have so far pushed back on that idea, saying taper talk is premature given the deadly third wave of the pandemic.

With policy unchanged today, the ECB’s deposit rate remains at -0.5% and the main rate at 0%. But other central banks have started heading for the exit.

The Bank of Canada signalled this week that it could start hiking interest rates in late 2022, as it sharply boosted its outlook for the Canadian economy and reduced the scope of its bond-buying programme.

ECB President Christine Lagarde told today’s press conference afterwards that economic activity in the euro area may have contracted in the first quarter of this year. However, early indications point to a resumption of growth from this month.

Manufacturing continues to recover and the services sector, which is still in decline, shows signs of ‘bottoming out’, according to President Lagarde.

Inflation in the euro area was 1.3% in March. This is up on the figure of 0.9% recorded in February, based on higher energy prices which offset lower food prices.

Underlying price pressures are expected to continue to increase this year.

President Lagarde also defended the continuation of the bank’s negative interest rate for deposits by commercial banks, which remains at -0.5%.

In answer to a question about the practice of imposing negative rates on depositors by banks in Germany, the President said the policy was “effectively supporting the economy” by keeping lending rates low and encouraging businesses to invest and households to borrow.

Ms Lagarde said that while euro area banks are imposing negative rates on corporate customers, only 5% of household deposits are subject to negative rates.

In Germany, the rate is estimated to be double that, around 10%.

Ms Lagarde said she appreciates that people who are saving are not satisfied with the consequences of negative rates but there is always a trade off and the bank has to look at the aggregate economy and its mandate.

Article Source – ECB sticks with euro zone stimulus plans – RTE

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