October 1, 2020

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ECB holds rates as it assesses strength of pandemic recovery

2 min read

The European Central Bank has left its monetary policy unchanged as it assesses whether the economic recovery from the coronavirus pandemic could be held back by a fresh surge in infections and the euro’s rise.

The eurozone’s central bank said it “continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner”.

The central bank kept its main deposit rate unchanged at minus 0.5 per cent and said its bond purchases would continue “as long as necessary to reinforce the accommodative impact of its policy rates”.

Most economists expect the ECB to expand its €1.35tn emergency bond-buying programme as early as December if inflation shows little signs of bouncing back from its recent lows. Some analysts believe eventually it may also have to cut rates further into negative territory.

The bloc suffered a record postwar contraction of 11.8 per cent in the three months to the end of June, from the previous quarter.

The ECB is due to publish updated economic forecasts later on Thursday, which are likely to include a slight upward revision of its growth forecast for this year after the downturn proved marginally shallower than initially expected. 

However, the central bank is also expected to cut its medium-term inflation forecast to reflect the impact of the euro in lowering import prices, taking it further away from its core price stability target for inflation to be just below 2 per cent. 

While there are signs that the economy has begun to rebound strongly in the third quarter, economists fear that rising numbers of coronavirus infections, as well as the stronger euro, could weigh on the recovery.

Recent economic data indicate that the rebound in consumer and business activity has begun to run out of steam, while Spanish coronavirus cases are back to the levels they reached at the peak of the pandemic in March and April.

The euro has risen 10 per cent against the dollar since the pandemic swept across Europe in March and is up about 4 per cent against a trade-weighted basket of currencies over the same period. Economists say a stronger euro is likely to make the region’s exports less competitive.

The US Federal Reserve’s announcement last month — that it would shift to a more dovish policy stance with a new average inflation target — prompted the dollar to fall further against the euro and led analysts to question how the ECB will respond. 

2020-09-10 07:48:23

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