Europe’s Central Bank To Continue Monetary Stimulus

The European Central Bank improved its economic forecasts for the euro zone but said it would continue its aggressive monetary policy, signalling a possible divergence between its course and that of the US Federal Reserve, which could begin unwinding emergency support measures as early as next week.

At a press conference on Thursday, ECB President Christine Lagarde said she expected a strong recovery in economic activity on the continent as the pace of vaccination and the opening of shops and restaurants picked up.

At the same time, she warned that Europe was lagging behind the US in the recovery, noting that more than one in seven Europeans were still unemployed or on unpaid leave. In the US, annual inflation jumped to 5% in May, the highest in almost 13 years, while in the eurozone inflation is just 2%.

The US and the eurozone « have very different starting points, with different scales of fiscal stimulus », Lagarde said.

While the US economy has already recovered to pre-crisis levels and possibly even surpassed them, the eurozone won’t regain the ground lost during the pandemic until next year.

In a statement, the ECB said it would keep its key interest rate at -0.5% and continue buying eurozone bonds on the scale of the emergency PEPP programme worth €1.85 trillion ($2.2 trillion) until at least the end of March 2022. The ECB also noted that bond purchases will be carried out at a « significantly higher » pace than in the first months of this year, reiterating a statement made in March.

Such a decision was expected and did not cause much excitement on financial markets. Yields on 10-year Italian government bonds fell to 0.750 percent from 0.776 percent on Wednesday, while yields on similar Greek securities fell to 0.808 percent from 0.833 percent.

Lagarde said that the ECB leaders has not yet discussed slowing down bond purchases, adding that such a discussion would be premature. By contrast, Fed policymakers have recently signalled a willingness to raise the topic of stimulus tapering at the June 15-16 meeting.

Any divergence in rates between the ECB and the Fed would prevent the euro from rising against the dollar by supporting European businesses during the recovery phase.


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