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ECB opts to wait and see, leaves rates and stimulus program unchanged


17 July 2020

The European Central Bank opted Thursday to keep its interest rates and emergency coronavirus stimulus program unchanged, while it monitors the economic strength of the euro zone. It said it would continue with its massive stimulus program announced in March to mitigate the economic shock from the pandemic.

Last month, it expanded its Pandemic Emergency Purchase Program by 600 billion euros, bringing the size of the stimulus program to 1.35 trillion euros ($1.54 trillion) to be deployed until June 2021, or until the bank believes the crisis is over.

In a statement accompanying the decision Thursday, the central bank said asset purchases under PEPP would continue to be conducted in a “flexible manner” over time, across asset classes and jurisdictions. The interest rate on its main refinancing operations stands at 0%, and the interest rates on its marginal lending facility and deposit facility remain at 0.25% and -0.50% respectively. The ECB expects rates to remain at their “present or lower” levels until it has seen the inflation outlook “robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

The euro was little changed against the dollar following the decision, hovering at around $1.14. The latest economic projections from the ECB have pointed to an 8.7% contraction in GDP (gross domestic product) for the euro zone this year. However, the IMF has warned that the region could shrink as much as 10.2% in 2020.

Speaking at a press conference Thursday, ECB President Christine Lagarde said that while activity has begun to pick up, the recovery is in its early stages and remains uneven across sectors and jurisdictions, leaving the outlook “highly uncertain” with risks tilted to the downside.

Recent economic data has shown a rebound in economic activity, which has coincided with many European countries lifting some of their lockdown measures. However, two ECB members have cautioned about the pace of economic recovery. ECB Chief Economist Philip Lane warned in a speech last month that, “weak demand, continued supply constraints and ongoing social distancing restrictions are hampering the normalization of economic activity.”

#source

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