ECB to reassure on cheap money as virus woes persist


FRANKFURT – Christine Lagarde is expected to stress the European Central Bank’s commitment to cheap money on Thursday as Europe’s biggest economies battle a surge in coronavirus infections that could slow the eurozone recovery.

After calming jittery markets last month by promising to “significantly” step up the pace of its pandemic emergency bond purchases, analysts say the ECB’s 25-member governing council is under no pressure to take fresh action.

Instead, president Lagarde is likely to use her 2:30 pm (1230 GMT) press conference to reiterate the message that there will be no premature end to “favourable financing conditions” until the crisis is deemed over and the rebound is firmly on track.

The Frankfurt institution is widely predicted to hold interest rates at historic lows, including a deposit rate of minus 0.5 percent — meaning banks pay to store excess cash with the ECB.

No tweaks are expected either to the ECB’s 1.85 trillion euro ($2.2 trillion) pandemic emergency bond purchasing programme (PEPP), set to run until March 2022.

“The ECB press conference might well be reassuringly boring this time,” said Berenberg bank economist Holger Schmieding.

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.

Lagarde may also repeat her plea for eurozone governments to share the load through fiscal stimulus.

Those efforts were given a boost when a top German court on Wednesday threw out a legal challenge against the European Union’s 750-billion-euro recovery fund, paving the way for its ratification.

Lagarde has frequently called for the landmark fund to be implemented, saying it has a “key role” to play in nursing the region back to health.

Looking past inflation

The former French finance minister and ex-head of the International Monetary Fund can also expect to be quizzed about the future pace of asset purchases.

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.

While investors are keen for any insight into the future rhythm of the purchases and how the ECB plans to eventually wind down the scheme, observers believe Lagarde will keep her cards close to her chest.

“Silence is golden,” said ING bank economist Carsten Brzeski, adding that the next meeting on June 10 should bring more clarity, when the ECB unveils new growth and inflation forecasts.

In quarterly projections published in March, the ECB surprised observers by slightly raising its 2021 growth forecast from 3.9 to 4.0 percent, 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.

“In June, the ECB and markets will have a much better idea about the severity of the current wave of infections and restrictions as well as the progress of the vaccination campaign and its impact on the economic outlook,” said Schmieding.

Eurozone inflation meanwhile continued its upward trend and climbed to 1.3 percent 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 percent.

Lagarde however stressed in March that price growth is being driven by “temporary factors” linked to the pandemic, such as pent-up consumer demand as virus curbs are relaxed.

The ECB “will see through that”, she said, and stick with its ultra-loose monetary policy so long as underlying inflation remains weak.