Friday, 16 April, 2021

European Central Bank keeps stimulus programs on track

Euro resumes gains before ECB decisions What to expect from the ECB later today?
Ginger Lawrence | 24 January, 2021, 03:08

She cited encouraging signals including the news about the prospects for the global economy, the agreement on future EU-UK relations and the start of vaccination campaigns.

Europe's top economy Germany this week extended its partial lockdown until February 14, and Chancellor Angela Merkel has not ruled out border checks to slow the spread of the new strains.

"The intensification of pandemic poses some downside risks to the short-term economic outlook", she added.

The ECB previous year took unprecedented steps to cushion the economic impact of the Covid-19 crisis on the eurozone.

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".

"The ECB will likely be happy to sit on the sidelines for some time and use the flexibility provided within the existing measures rather than agree any further measures, while conducting the review of its policy framework", said Sandra Horsfield at Investec.

The euro area remains deeply dependent on the ECB's strategy of using purchases to cap yields, which curbs the cost of massive fiscal support. The governing council added 500 billion euros to its pandemic emergency stimulus bond purchases, bringing the total to 1.85 billion euros ($2.2 trillion), and extended the regular purchases through at least March 2022.

Lagarde also urged capitals to conclude the ratification of the EU's new budgetary ceiling, so the European Commission can borrow the €800 billion for the recovery fund from the markets.

Lagarde may also address questions on the ECB's strategy review, which is set to produce results this year on issues including the institution's inflation target, and the role the central bank can play in combating climate change.

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The goal of the measures is to keep borrowing costs low to encourage spending and investment in the 19-nation currency club, in a bid to boost growth and inflation.

Economists expect the European Central Bank to take little further action, besides reviewing their inflation target and retaining flexibility on purchases of bonds. Prices declined by 0.3% in December, recent data showed.

First, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00 per cent, 0.25 per cent and -0.50 per cent respectively.

The president may also be quizzed on the persistently strong euro, which has been above US$1.20 since early December and is near a record high on a trade-weighted basis.

Complicating the ECB's efforts is the appreciation of the euro, which has risen by more than 10 percent against the greenback since late February.

Lagarde agreed that inflation was "likely to increase in the coming months", partly also due to the end of a temporary sales tax cut in Germany from January.

As such, this is one area that will also keep the European Central Bank more guarded and preferably having to respond when only necessary but not before it happens.

Lagarde said the governing council was monitoring exchange rates "very carefully".