The eurozone’s nascent recovery from the economic damage done by the coronavirus pandemic faces several potential threats, Christine Lagarde, president of the European Central Bank, has warned, after keeping its monetary policy on hold.
The ECB governing council on Thursday hit pause after four months of ramping up its monetary stimulus, as it entered what analysts called “a wait and see” period to assess the speed of economic recovery before launching new measures.
Although there had been a “significant but uneven recovery” since the economy bottomed out in April, Ms Lagarde said that “exceptionally elevated uncertainty” was still weighing on consumer spending and business investment.
She said that “price pressures are expected to remain very subdued” and this meant “ample monetary stimulus remains necessary to support the economic recovery and to safeguard medium-term price stability”.
“Overall, the governing council assesses the balance of risks to the euro area growth outlook to remain on the downside,” she added, after the ECB kept its main deposit rate unchanged at minus 0.5 per cent.
At its previous monetary policy meeting in early June, the ECB expanded the amount of bonds and other assets it plans to buy under its Pandemic Emergency Purchase Programme from €750bn to €1.35tn and extended its timespan until at least the end of 2022.
Since then, the outlook for the eurozone economy has tentatively brightened. Consumers went on a spending spree after shops reopened in May, helping retail sales to rebound from record falls in March and April, while industrial output also recovered, albeit at a slower rate.
However, the eurozone economy is still heading for the worst recession for a generation, while inflation remains closer to zero than to the ECB’s target of just under 2 per cent.
After assessing the impact of the multiple stimulus measures it has launched in response to Covid-19, Ms Lagarde said they would add 1.3 percentage points to eurozone gross domestic product and 0.8 percentage points to inflation by 2022.
The signs of recovery had prompted some senior policymakers — including ECB executive director Isabel Schnabel and Dutch central bank governor Klaas Knot — to say it may not need to spend the entire €1.35tn put aside for its emergency bond-buying programme.
Ms Lagarde said the bond-buying policy was working well and “we are in a good place at the moment” after government borrowing costs dropped back close to pre-pandemic levels. However, she said the emergency programme would use up its full allocation unless there was “a significant upside surprise” — something she said there was no sign of yet.
She also cited a number of potential threats to the recovery in the coming months.
The ECB’s quarterly survey of banks found many of them expected to pull back on lending to companies over the summer because of fears that governments could wind down loan guarantee schemes — a scenario that Ms Lagarde urged policymakers to avoid.
“We have encouraged fiscal authorities to avoid that cliff effect,” she said, adding that this would help to avert a “potential tightening” of financial conditions that could cut short the recovery.
Ludovic Subran, chief economist at German insurer Allianz, said the risk of banks being hit by €300bn in new non-performing loans could be the next big challenge for the ECB in the coming months. “The ECB has gone on holiday, but the back to school is going to be quite complex,” he added.
Another risk for the eurozone’s export-reliant economy was that the pandemic would cause a longer-term reduction in trade, Ms Lagarde said, adding that some Asian economies had been forced to “reconsider and rely more heavily on their domestic market”.
Ms Lagarde said the decline in eurozone GDP in the second quarter of this year was set to be close to the 13 per cent contraction the ECB forecast in June; that will be followed by a rebound in the third quarter.
She forecast that headline inflation was likely to fall further in the coming months as weak demand and a cut in German value added tax put downward pressure on prices, adding that price growth was not likely to start to pick up until early next year.
Ms Lagarde urged EU leaders to waste no time in agreeing a €750bn recovery fund for the countries hit hardest by the pandemic at a summit that will be held later this week.
Jörg Krämer, chief economist at Commerzbank, said: “All in all, the ECB is in a wait-and-see position. However, the ECB may further loosen its monetary policy from autumn onwards.”
https://news.google.com/__i/rss/rd/articles/CBMiP2h0dHBzOi8vd3d3LmZ0LmNvbS9jb250ZW50L2M2NzFlNzk1LTEzOGEtNGY0NS1hNDBmLTAxMmY1YmJjNGNjY9IBP2h0dHBzOi8vYW1wLmZ0LmNvbS9jb250ZW50L2M2NzFlNzk1LTEzOGEtNGY0NS1hNDBmLTAxMmY1YmJjNGNjYw?oc=5
2020-07-16 16:56:00Z
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