FRANKFURT —- The European Central Bank improved its economic outlook for the eurozone, but said it would keep its aggressive monetary stimulus in place, indicating a possible divergence with the Federal Reserve, which could begin to discuss an eventual slowdown in its economic policy. fueled by pandemic-money politics next week.
At a press conference on Thursday, ECB President Christine Lagarde said she expects a strong rebound in economic activity across the continent as the pace of Covid-19 vaccines picks up and shops and restaurants reopen.
However, he warned that the region’s economic recovery lags behind that of the United States, with more than one European in seven still unemployed or on leave from work. US inflation rose to 5% in May on an annual basis, the highest annual inflation rate in nearly 13 years, compared to just 2% in the eurozone.
The US and the euro area “start from a completely different basis, the fiscal stimulus [programs] they are of different magnitude, ”and inflationary pressures are“ of a completely different magnitude, ”Lagarde said.
While the US economy may have already outgrown its pre-pandemic size, the eurozone is not expected to regain ground lost to the pandemic until next year.
The ECB said in a statement that it will keep its key interest rate at minus 0.5% and continue to buy eurozone debt under an emergency bond purchase program of 1.85 trillion euros, equivalent to 2.2 trillion dollars, until at least March 2022. buy those bonds at a “significantly higher rate” than during the first months of this year, repeating a promise made in March.
The move had been highly anticipated and created few ripples in financial markets. The yield on the Italian 10-year debt fell to 0.750% from 0.776% on Wednesday, while the yield on the Greek equivalent fell to 0.808% from 0.833%.
Lagarde said ECB officials had not yet discussed reducing their bond purchases, saying such considerations were premature. By contrast, Federal Reserve officials have recently signaled that they are preparing to think about reducing central bank stimulus at a policy meeting on June 15-16.
Any divergence between the ECB and the Fed should help keep the euro low against the dollar and support European businesses as they emerge from the crisis.
“Other central banks are constrained by the Fed,” said Stefan Gerlach, former deputy governor of Ireland’s central bank. “If the ECB decides to tighten monetary policy before the Fed, for example, the euro will rise immediately against the dollar, which hurts Europe’s exports.”
However, with the eurozone’s recovery picking up pace, some analysts said the ECB may be waiting too long to adjust its policy mix to better economic news.
“The longer the bank keeps its foot on the gas even after the economy has accelerated, the more difficult it will be for the ECB to engineer a smooth exit later on,” said Holger Schmieding, chief economist at Berenberg Bank.
The ECB said on Thursday that it expects the eurozone economy to grow 4.6% this year and 4.7% next year, compared with forecasts for growth of 4% and 4.1%, respectively. in March. It expects inflation to reach 1.9% this year and 1.5% next year, above previous forecasts of 1.5% and 1.2%, respectively.
Analysts said the ECB would likely need to change course in the coming months and reveal plans to reduce its bond purchases to prevent the economy from overheating. That could happen after policy meetings in September or December, they said.
A sharp rise in commodity prices over the past year is fueling concern among investors that inflation could rise more durably, driving up market interest rates and triggering big swings in commodity prices. assets and capital flows globally.
However, the ECB is likely to be wary of reducing its stimulus before presenting the results of a one-year review of its monetary policy strategy, which is expected in the fall and could alter the bank’s inflation target, analysts said. If the ECB were to raise its inflation target to 2% from just below 2% after the review, for example, that would require additional stimulus.
The ECB might also want to avoid signaling its next move until after Federal Reserve Chairman Jerome Powell speaks more explicitly about reducing central bank asset purchases, which analysts say could happen during the Symposium. Jackson Hole Cheap as of Aug 26.
“It’s easier for the ECB to follow than to lead” the Federal Reserve, said Marchel Alexandrovich, an economist at Jefferies in London.
Write to Tom Fairless at [email protected]
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