European Central Bank maintains stimulus despite brighter economic outlook

The European Central Bank kept its stimulus package and interest rates unchanged on Thursday despite significantly raising its economic outlook for this year and next as Covid-19 restrictions ease and the eurozone recovery ramps up. ECB president Christine Lagarde held the pandemic emergency purchase programme at €1.85 trillion ($2.25tn), after a €500 billion boost in December , but said the eurozone economy was now expected to grow by 4.6 per cent this year and 4.7 per cent in 2022. This is up from earlier projections of 4 and 4.1 per cent respectively, while the growth forecast for 2023 remained unchanged at 2.1 per cent, Ms Lagarde said. The ECB renewed its pledge to maintain faster emergency bond-buying to sustain the eurozone's recovery from the pandemic-induced crisis, with Ms Lagarde saying it would be "premature" to start tightening monetary policy, with continued support needed to ease economic unease. “Uncertainties remain as near-term economic output depends on the course of the pandemic and how the economy responds after reopening,” Ms Lagarde said in a press conference, adding that keeping the easy money taps open "remains essential to reduce uncertainty and bolster confidence". The ECB raised its inflation projections for this year and next mostly because of higher commodity prices. However, she downplayed inflation climbing to 2 per cent in May, technically above its target of almost 2 per cent, saying it was the result of temporary factors and the increase energy prices. She said there was still “significant economic slack” holding back underlying inflationary pressures. Inflation is now seen averaging 1.9 per cent this year, above the 1.5 per cent projected in March, while in 2022 it is seen at 1.5 per cent, against an earlier projection for 1.2 per cent, Ms Lagarde said. The ECB decision to maintain a higher pace for its Pepp programme was no surprise to analysts, with the central bank insisting that tapering was not yet on the cards. “The bank is still likely to engineer a very gradual taper in the second half of this year but the big picture is that policy will remain highly accommodative for a long time to come,” said Andrew Kenningham, chief Europe economist at Capital Economics. The decision underscores the ECB’s determination to allow no let-up in stimulus, even as the region’s vaccination campaign and easing of lockdown restrictions clear the way for a full economic rebound. The eurozone economy shrank less than expected in the first quarter of this year , indicating a resilience despite tighter lockdowns at the start of the year. Gross domestic product in the 19 countries sharing the euro contracted 0.3 per cent in the first quarter of this year compared to the previous three-month period, with a 1.3 per cent annual decline, revised data from Eurostat showed, with the outlook for the second half of the year even more positive. The ECB accelerated the pace of its bond-buying programme three months ago to rein in rising borrowing costs and analysts have since argued that the economy is not ready for any withdrawal of support. The euro rose briefly to a session-high on Thursday after the ECB decision, before reversing gains to trade 0.1 per cent lower at around $1.2170. The ECB reiterated that its Pepp programme would run until March 2022 at the earliest, or "until it judges that the coronavirus crisis phase is over". It reserved the right to buy less than its purchase quota or increase it as required to "maintain favourable financing conditions". "The governing council stands ready to adjust all of its instruments as appropriate to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry," the ECB said.

European Central Bank maintains stimulus despite brighter economic outlook

ECB raises growth forecast as Covid curbs ease and eurozone recovery gathers pace