By DAVID McHUGH
AP Business Writer
FRANKFURT, Germany (AP) — The European Central Bank left its key pandemic support for the economy running full blast even as the economy shows signs of recovery thanks to lower virus cases and fewer restrictions on activity in the 19 countries that use the euro currency.
The bank expects “a sizeable improvement” over the second quarter of the year, ECB President Christine Lagarde said Thursday after the decision was released.
But she cautioned that the rebound “continues to depend on the course of the pandemic and how the economy responds after reopening.”
Lagarde went to some length to underscore that the bank’s 25-member policy council did not even discuss an exit from its ongoing bond purchase stimulus, saying such a discussion would be “too early, premature.”
While economic activity is picking up, Europe is not expected to reach pre-pandemic levels of output before 2022, well behind the US and China. Economic output was minus 0.3% in the first quarter; the ECB foresees a rebound over the remaining months of the year that would take growth to 4.6% for the year.
Lagarde downplayed inflation that has ticked higher recently, saying it was the result of temporary factors and an increase energy prices. She said there was still “significant economic slack” holding back underlying inflationary pressures and that the bank was concerned about post-pandemic “scarring” of the economy due to changed consumption habits and loss of jobs leading to workers needing training in new skills.
The central bank for the 19 countries that use the euro said in its policy statement Thursday that emergency bond purchases would remain at “a significantly higher pace” over the coming quarter than during the first three months of the year. That mirrored language from its last meeting on April 22, changed only to extend the higher pace of purchases by a quarter.
The ECB has been purchasing around 85 billion euros per month in government and corporate bonds as part of a 1.85 trillion euro ($2.25 trillion) effort slated to run at least through early next year. Purchases were stepped up in March amid lagging vaccinations and high COVID-19 case numbers.
The purchases drive up the prices of bonds and drives down their interest yields, since price and yield move in opposite directions. That influences longer-term borrowing costs throughout the economy, sending them lower.
That’s exactly what the bank wants at a time when many companies are struggling with reduced demand, higher debt and the need to keep credit lines open so they can get to the other side of the pandemic. That is one reason for Lagarde and the bank’s governing council to avoid any early discussion of tapering the stimulus, since that could send market borrowing costs higher and hurt the recovery just as it’s getting going.
Rising inflation complicates the ECB’s messaging. Normally, rising prices would lead a central bank to withdraw its stimulus. But in this case, ECB officials and economists say recent higher inflation figures are the result of temporary factors that will fade, leaving inflation below the ECB goal.
Eurozone annual inflation hit 2.0% in May due largely to rising energy prices. The ECB’s goal is less than, but close to 2%. The base comparison to lower energy prices during the pandemic year 2020 will soon drop out of the statistics, however, meaning post-pandemic inflation could be weaker than current figures might otherwise suggest.
The bank also left its key interest rate benchmarks at record lows. The rate at which it lends to banks is zero; the rate it pays on overnight deposits from bank remains at minus 0.5%
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