ECB Forecasts Said to Show More Confidence in Economic Outlook

(Bloomberg) -- Some European Central Bank policy makers have become more confident in their forecasts for the region’s economic recovery, potentially reducing the need for more monetary stimulus this year, according to euro-area officials familiar with the discussions.

The latest projections for output and inflation will show only slight changes to the June outlook, the people said, asking not to be named because the report will only be published after the Governing Council meets on Thursday.

The euro gained after the report, which signals relief that while the recovery still remains highly uncertain, some of the downside risks that the ECB stressed in its previous round of forecasts haven’t so far materialized.

The ECB predicted a record 8.7% contraction for 2020 back in June. That figure will now show an improvement, one person said, with private consumption in particular doing much better than expected.

The officials also said that in their view additional monetary support beyond the current 1.35 trillion-euro ($1.6 trillion) emergency bond-buying program doesn’t appear warranted from the current perspective, though that could change. The next round of forecasts in December will be key for that decision, they said.

The euro jumped, putting it on track to snap six days of declines. It was up 0.3% at $1.1815 at 3:36 p.m. Frankfurt time. German 10-year bond yields rose slightly.

An ECB spokesman declined to comment. A full discussion of monetary policy will be held at Thursday’s meeting.

Most respondents in a Bloomberg survey last week predicted an increase in the bond-buying program by December, with a median estimate of 350 billion euros. Economists don’t expect any action this week.

The ECB has previously stressed downside risks to its outlook such as a second wave of infections, more permanent damage to the labor market and weak consumption as a result of elevated uncertainty.

Government Response

Recent data suggests some of those concerns may have eased. Retail sales have already made up all of the ground lost during the worst phase of the crisis, and governments have been reluctant to go back to full-fledged lockdowns even as the virus spreads.

Many nations have extended their furlough programs, and the European Union has agreed on a massive recovery fund.

The less-downbeat view has been reflected in recent comments from some of the ECB’s top officials. Chief economist Philip Lane, who is in charge of forecasts, argued recently that “what we’ve seen over the summer is more or less in line with our baseline projections.”

Executive Board member Isabel Schnabel came to the the same conclusion. As long as the trend remains intact, there’s no reason to change policy, she said.

The euro’s relative strength has been added to the ECB’s list of worries though. It has jumped more than 10% against the dollar since late March, breaking through $1.20 for the first time in over two years.

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