ECB keeps cheap money tap open as virus woes persist

Agence France-Presse . Frankfurt | Published: 22:45, Apr 22,2021


Christine Lagarde on Thursday underlined the European Central Bank’s commitment to cheap money as the eurozone was still tightly in the grip of a coronavirus pandemic that has left the region’s economic outlook shrouded in uncertainties.

With the bloc deeply in need of support economically to mitigate the devastation wrought by the health crisis, the ECB chief said at the latest talks among governors the issue of winding down its 1.85 trillion ($2.2 trillion) pandemic emergency bond purchasing programme come up because it was ‘simply premature’.

‘There is a long way to go until we’ve crossed the bridge of the pandemic and the recovery is sustainable and solid,’ said Lagarde.

A vaccination campaign, currently being ramped up after a stuttering start, would likely underpin ‘a firm rebound in economy activity in the course of 2021,’ Lagarde said.

But eurozone economies will still need all the help they can get to return sustainably to the path of growth.

As such, she repeated her plea for eurozone governments to do their part, including by quickly getting a 750-billion-euro EU coronavirus recovery fund operational.

‘This would allow the next generation EU programme to contribute to a faster, stronger and more uniform recovery,’ she said.

The landmark fund will offer loans and outright grants to EU countries hit hardest by the pandemic, such as Italy. It smashes long-held stereotypes of Germany as a ‘frugal’ country staunchly opposed to taking responsibility for others’ debt.

The fund was given a boost on Wednesday when a top German court threw out a legal challenge against it, paving the way for its ratification.

But with only 17 out of 27 countries having ratified, impatience has been rising from countries that sorely need aid.

For its part, the ECB on Thursday kept to its its highly expansionary stance — holding its interest rates at historic lows and maintaining the accelerated pace of its pandemic bond purchases.

Interest rates are staying at historic lows, including a deposit rate of -0.5 per cent — meaning banks pay to store excess cash with the ECB.

The ECB’s 1.85 trillion euro ($2.2 trillion) pandemic emergency bond purchasing programme (PEPP), set to run until March 2022, was also kept intact, although the council stressed it stood ready to ‘adjust all of its instruments, as appropriate’, should it become necessary.

The goal of the ECB’s measures, which also include super cheap loans for banks, is to keep borrowing costs low to encourage spending and investment in the 19-nation currency club in order to drive up growth and inflation.

Following last month’s pledge to accelerate debt purchases in response to rising bond yields, the ECB’s weekly PEPP purchases have averaged 17 billion euros, compared to around 12 billion in January and February.

In quarterly projections published in March, the ECB surprised observers by slightly raising its 2021 growth forecast from 3.9 to 4.0 per cent, fuelled by optimism about Europe’s Covid-19 vaccine rollout and the global economic rebound.

While the speed of inoculations has picked up across the bloc in recent weeks after a bumpy start, many countries are battling the spread of more contagious virus variants, including strains first detected in Britain and South Africa.

Top eurozone economies Germany, France and Spain are among those that have extended or reimposed shutdowns and travel curbs to rein in Covid cases, weighing on second-quarter growth prospects.

Eurozone inflation meanwhile continued its upward trend and climbed to 1.3 per cent in March, powered in part by higher energy prices.

Economists see inflation bounding even higher in the months ahead, possibly exceeding the ECB’s long-out-of-reach inflation target of ‘close to, but below’ 2.0 per cent.

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