Lagarde Says ECB Isn’t Discussing Phase-Out of Stimulus
European Central Bank President Christine Lagarde said the institution isn’t discussing the phasing out of its emergency bond buying even as it sees signs that the economy is starting to shake off the coronavirus pandemic.
While noting that medium-term risks for growth are balanced, she pushed back against any suggestion the ECB is thinking about scaling back stimulus, describing the idea as “premature.”
“Incoming economic data, surveys and high-frequency indicators suggest that economic activity may have contracted again in the first quarter of this year, but point to a resumption of growth in the second quarter,” Lagarde said Thursday after the institution kept its stimulus program in place. “Any phasing out was not discussed and it is just premature.”
The Governing Council confirmed that its 1.85 trillion-euro ($2.23 trillion) bond-buying program will run at an elevated pace in the current quarter. Officials also held the deposit rate at -0.5% and pledged to continue long-term loans to banks to keep credit flowing to businesses and households.
“Overall, while the risks surrounding the euro area growth outlook over the near term continue to be on the downside, medium-term risks remain more balanced,” Lagarde said.
Italian bond yields were little changed at 0.76% at 2:27 p.m. London time, having risen to as high as 0.79% after President Christine Lagarde began the press conference.
What Bloomberg Economics Says...
“Bloomberg Economics expects the pace of purchases to be scaled back in June, barring any renewed upward pressure on interest rates from abroad.”
-David Powell. Read the ECB REACT.
The ECB significantly stepped up asset purchases last month to contain the fallout of a government-bond sell-off that was driven a speedy U.S. economic recovery from the coronavirus pandemic. Such market moves pose a risk to euro-zone activity, as sovereign yields are used as a reference for the cost of bank loans to companies and households.
Officials have spent an average net 17 billion euros per week under their pandemic program since then, up from about 14 billion per week in the first weeks of 2021. The aim is to keep borrowing costs for companies, households and governments across the euro area favorable during the pandemic. Net purchases are currently set to last until the end of March 2022.
The intensity of purchases under the emergency program doesn’t depend on a specific date, but rather on the state of financing conditions as well as the inflation outlook, Lagarde said.
“We conduct a joint assessment of those financing conditions throughout the whole spectrum and the inflation outlook,” she said. “It’s on the basis of these two elements -- which are quite complicated in their own respect, each of them -- that we determine the pace of purchases.”
The ECB is set to produce new economic forecasts when it next meets in June.
“If the economy recovers from the Covid-19 recession and underlying inflation picks up gradually, the ECB will eventually have to address the question as to when and how it should scale back its asset purchases in the future,” said Holger Schmieding, an economist at Berenberg.
The European Union has significantly sped up its vaccination campaign in recent weeks, smoothing the path for an economic pickup later this year. For now, wide parts of the bloc are still facing severe restrictions to fight an elevated level of infections.
“The progress with vaccination campaigns, which should allow for a gradual relaxation of containment measures, should pave the way for a firm rebound in economic activity in the course of 2021,” Lagarde said.
The ECB will also continue to monitor the euro’s exchange rate and its implications for the inflation outlook, the President said. A strong currency can pose a headache for the central bank as it dampens import prices and makes exports from the euro area less competitive.
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