European Central Bank faces gloomier picture for economy

Andrew Cummings
January 24, 2021

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.

"If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full", she said.

The euro has dropped 1% on a trade-weighted basis since the start of the year, but is up almost 7% over the last 12 months.

As expected, the Frankfurt institution held key rates at historic lows, including a deposit rate of minus 0.5 per cent - meaning banks pay to store excess cash with the ECB. 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.

Coronavirus cases have surged across Europe since the autumn, forcing countries to lock down their economies once again. Germany, the currency bloc's largest economy, decided this week to extend its strict lockdown measures until mid-February.

Yet she said the Bank's monetary policy is now "very accommodative".

While the roll-out of vaccines allows for greater confidence in the resolution of the COVID-19 health crisis, it will take time until widespread immunity is achieved, and further adverse developments related to the pandemic can not be ruled out, Lagarde said on Thursday. 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.

Uncomfortably low inflation is set to remain a thorn in the ECB's side for years to come, however, even if surging oil demand helps put upward pressure on prices in 2021.

Inflation has remains stubbornly below the ECB's 2% target.

Jai Malhi, strategist at JPMorgan Asset Management, said: "The ECB held policy steady today, hoping that its measures implemented in the December meeting alongside the European Union recovery fund rollout, will be enough to support the economy until the outlook brightens". Manufacturing continues to hold up well, but services are being "severely curbed", she said.

The economy is being propped up by massive support from the European Central Bank, national governments, and the EU.

A stronger euro makes imports cheaper, keeping a lid on consumer prices, while exports become less competitive, hurting growth prospects.

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.

The central bank president stressed that an important variant for the implementation of the PEPP is the so-called "favorable financing conditions", which would be assessed in a holistic approach, taken into account multiple indicators across all sectors, and also relative to the inflation dynamics.

"After all, the European Central Bank is now saying that if yields remain as low as they are now, there isn't a reason to deploy the PEPP in full".

Vistesen said the ECB's decision to increase stimulus last month, against the prevailing narrative, meant there was enough firepower on the table already.

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