ECB Adopts Wait And Watch Amid Uncertain Outlook


The European Central Bank on Thursday left its key interest rates and the volume of its asset purchases unchanged as policymakers saw early signs of a gradual economic recovery from the slump induced by the coronavirus pandemic, but significant uncertainty regarding the outlook.

“Incoming information since our last monetary policy meeting in early June signals a resumption of euro area economic activity, although the level of activity remains well below the levels prevailing before the coronavirus (COVID-19) pandemic and the outlook remains highly uncertain,” ECB President Christine Lagarde said in her introductory statement.

“Against this background, ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability,” she added, reconfirming the ECB’s “very accommodative” monetary policy stance.

The main refi rate was left unchanged at a record low zero and the deposit rate at -0.50 percent, in line with economists’ expectations. The lending rate was kept at 0.25 percent.

Policymakers expect the key ECB interest rates to remain at their present or lower levels until the inflation outlook robustly converges to a level sufficiently close to, but below, 2 percent within the projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics, the bank said, reaffirming its forward guidance.

The ECB also said it will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of EUR 1,350 billion.

The PEPP was announced with a size of EUR 750 billion in March as the Covid-19 began to severely affect the economy, and its size was increased by EUR 600 billion in June.

Asset purchases under PEPP contribute to easing the overall monetary policy stance, thereby helping to offset the pandemic-related downward shift in the projected path of inflation, the bank said.

The purchases will continue to be conducted in a flexible manner over time, thus allowing to effectively stave off risks to the smooth transmission of monetary policy, the ECB added.

These purchases are expected to continue until at least the end of June 2021 and, in any case, until the Governing Council judges that the coronavirus crisis phase is over, the bank said.

Proceeds from maturing securities under PEPP will be reinvested until at least the end of 2022. The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance, the bank noted.

The ECB will also continue its asset purchases under the asset purchase programme at a monthly pace of EUR 20 billion and an additional EUR 120 billion temporary fund until the end of this year.

The central bank expects the monthly purchases to run for as long as necessary and to end shortly before policymakers start raising the key interest rates.

The principal payments from maturing securities under APP will be reinvested in full for an extended period of time past the date when the bank begins to raise interest rates, and as long as to maintain favorable liquidity conditions and an ample degree of monetary accommodation.

The central bank will continue to provide ample liquidity through its refinancing operations. The latest operation in the third series of targeted longer-term refinancing operations (TLTRO III) has registered a very high take-up of funds, supporting bank lending to firms and households, Lagarde said.

The Governing Council continues to stand ready to adjust all of its instruments, as appropriate, the ECB chief said.

The euro area economy contracted 3.6 percent in the first quarter and is expected to have shrank further in the second quarter. However, a rebound is expected in the third quarter as the Covid-19 containment measures are eased further.

“Although uncertainty about the overall speed and scale of the rebound remains high,” Lagarde said.

“Overall, the Governing Council assesses the balance of risks to the euro area growth outlook to remain on the downside,” she added.

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