European Central Bank stimulus on track as economy struggles

22 Janvier, 2021, 09:57 | Auteur: Auguste Feret
  • The European Commission is to work alongside the European Central Bank in probing a range of 'policy legal and technical' pitfalls that could emerge as part of plans to introduce a Digital Euro crypto-currency in mid-2021

With more than a trillion euros in stimulus still in the pipeline to the economy, the European Central Bank left its key bond-purchase program unchanged Thursday as the 19-country eurozone endures a winter economic slowdown due to the pandemic.

ECB President Christine Lagarde told a news conference that the economy likely contracted in the last three months of 2020 and the outlook going forward faced risks.

Lagarde saluted the start of vaccinations as "an important milestone" despite "some difficulty" and said the latest data was still in line with the ECB's forecasts.

Europe's top economy Germany this week extended its partial lockdown until Feb 14 and Chancellor Angela Merkel has not ruled out border checks to slow the spread of the new variants. "We will have to look carefully at the financing conditions, and those people in the markets understand when and how financial conditions can evolve and change", she said.

The ECB boss urged Eurozone governments to keep spending to support their economies.

"We had anticipated the continuation and the lockdown measures that are now in place... and that leads us to conclude that our own forecast for 2021 is still broadly valid at this time", she said, while cautioning that short-term risk was "tilted to the downside, no question about it".

Lagarde stressed that "ample monetary stimulus" remained essential to steer the 19-nation currency club through the Covid-19 upheaval, and that the European Central Bank stood ready to do more as needed.

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The European Union's executive commission forecasts that the eurozone economy shrank 7.8% last year and should rebound by 4.2% this year. The ECB's decision not to adjust its key programs was largely expected because it added a major dose of stimulus only last month, at its December 10 meeting.

There is also around 1 trillion euros of untapped funds in the Pandemic Emergency Purchase Programme (PEPP) to back up her pledge to keep borrowing costs at record lows.

The bond purchases are a way of pumping newly created money into the economy, which aims to raise inflation from levels that are now considered too low.

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.

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

European Central Bank president Christine Lagarde said the eurozone economy probably contracted at the end of a year ago, meaning that the bloc now looks headed for a double-dip recession.

I would expect some trivial remarks about policymakers watching any advance in the euro rather closely but besides any potential verbal intervention, there shouldn't be much else to it as long as the euro doesn't rise too far, too fast.

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