central banks

ECB paves way for December stimulus as lockdowns return

Agence France-Presse

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ECB paves way for December stimulus as lockdowns return

(FILES) In this file photo taken on December 13, 2019 European Central Bank (ECB) President Christine Lagarde arrives for the second day of a European Union Summit at the Europa building in Brussels. - The European Central Bank kept rates on hold and maintained its pandemic monetary stimulus unchanged at a monetary-policy meeting on October 29, 2020, hinting at further stimulus in December as countries introduce tough restrictions to curb spiking coronavirus cases. ECB president Christine Lagarde's words will be closely scrutinised for every hint of possible action at a press conference at 13:30 GMT, as the central bank weighs up boosting its pandemic response to support fragile eurozone economies. (Photo by Alain JOCARD / AFP)


'The ECB was there for the first wave, the ECB will be here for the second wave,' says European Central Bank President Christine Lagarde as COVID-19 cases surge again

The European Central Bank (ECB) pledged on Thursday, October 29, to bolster its pandemic stimulus in December as surging coronavirus infections darken the eurozone’s economic outlook.

The recovery is “losing momentum more rapidly than expected” after the partial rebound seen in the summer, ECB President Christine Lagarde said after a virtual meeting of the 25-member governing council.

With risks “clearly tilted to the downside,” she said ECB governors will use next month’s updated growth and inflation forecasts to “recalibrate our instruments” to keep credit flowing in the 19-nation currency club.

“We agreed all of us that it was necessary to take action,” Lagarde told reporters in Frankfurt. “The ECB was there for the first wave, the ECB will be here for the second wave.”

The euro slid against the dollar following the pledge by the ECB to step up its support for the eurozone economy, falling to $1.1661 from $1.1746 late on Wednesday, October 28.

The promise of more monetary easing comes a day after France and Germany joined Italy and Spain in introducing new shutdowns to halt a second COVID-19 wave, set to inflict more economic pain.

The first wave of cases in March prompted the ECB to roll out a 1.35-trillion-euro bond-buying scheme to keep borrowing costs low and boost the economy.

Many observers expect the scheme, known as PEPP, to be beefed up at the next monetary policy meeting on December 10.

Lagarde however stressed that the ECB had more than just PEPP up its sleeve, and would look at “all the instruments that we have with the entire flexibility that we have” for its next moves.

“Going into today’s meeting…the only relevant question was when, and how, the ECB would ease again. Now the only question left is the size and composition of the easing package to be announced at the December meeting,” said Frederik Ducrozet of Pictet Wealth Management.

Early action?

As expected, ECB governors on Thursday kept interest rates at historic lows and maintained their ultra-cheap loans to banks, offering rates as low as -1%.

They also left unchanged their pre-pandemic asset-purchasing scheme to the tune of 20 billion euros a month, although some analysts expect the pace of the purchases could be increased soon.

Andrew Kenningham, an economist at Capital Economics, said the ECB might pull the trigger before the next meeting.

“With the region’s two biggest economies about to enter fresh national lockdowns, and others likely to follow suit, we would not rule out the possibility that the bank moves even before then,” he said.

Former French finance minister and International Monetary Fund chief Lagarde reiterated her plea for eurozone governments to share the load with fiscal efforts.

She called for the European Union’s historic 750-billion-euro coronavirus recovery package, agreed in principle in July, to become “operational without delay.”

Lagarde added that the outcome of the United States election and Brexit negotiations were “two large geopolitical risks” that policymakers would also take into account in their upcoming decision-making.

Deflation fears

The ECB’s unprecedented monetary stimulus is aimed at bolstering economic growth by encouraging spending and investment, and driving up stubbornly low inflation to its goal of “below, but close to 2%.”

Eurozone inflation however stood at -0.3% in September after dropping into negative territory in August, raising the dreaded specter of deflation.

Deflation, or a spiral of falling prices, is a worry for policymakers because it can deter customers from spending in anticipation of even cheaper prices, creating pressure on businesses which may end up cutting jobs or closing down.

Inflation in Germany, Europe’s top economy, on Thursday came in at -0.2% for October, the same rate as in September, dragged down by lower energy prices and a temporary sales tax cut.

The eurozone economy as a whole is expected to shrink by 8% this year before rebounding to see 5% growth in 2021, according to ECB forecasts released in September.

But most analysts agree that those projections are now outdated, with the final months of 2020 likely to be worse than expected.

The eurozone’s 3rd quarter gross domestic product figure will be released on Friday, October 30, and “might surprise on the upside,” Lagarde said.

“On the other hand, we are pretty confident that our number for the 4th quarter will be on the downside,” she added. – Rappler.com

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