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BCN-02
HEALTH-VIRUS-ECB-EUROZONE-INFLATION
ECB to beef up stimulus as second virus wave bites
FRANKFURT AM MAIN, Dec 6, 2020 (BSS/AFP) – The European Central Bank is set
to unleash more stimulus for the eurozone at its last meeting of the year on
Thursday, as the region’s battered economy grapples with a second coronavirus
wave.
ECB chief Christine Lagarde in October all but promised that extra support
was on the way, when she said the Frankfurt institution would “recalibrate”
its instruments in December.
The ECB will also unveil fresh economic forecasts likely to have been
revised downwards after a spike in virus cases forced renewed shutdowns
across Europe, although the prospect of mass vaccinations from next year
could brighten the longer term outlook.
Analysts widely expect the ECB’s governing council to add another 500
billion euros ($600 billion) to its 1.35-trillion-euro pandemic emergency
bond-buying programme (PEPP), and extend it beyond the current deadline of
June 2021.
The purchases are aimed at keeping borrowing costs low to encourage
spending and investment and bolster economic growth.
The ECB could also offer more ultra-cheap credit to banks for longer under
a scheme known as TLTROs, whereby banks get loans at highly favourable
interest rates in return for lending on to the wider economy.
The central bank is all but certain to keep interest rates at historic
lows, but may increase its pre-pandemic asset purchases from the current 20
billion euros a month.
At Thursday’s press conference, Lagarde is likely to reiterate pleas for
governments to share the load through fiscal stimulus, as EU member states
bicker over a 750-billion-euro recovery fund that has been blocked by Poland
and Hungary.
The ECB will be “under pressure to do more while the European budgetary
policy response is lagging behind,” said Pictet Wealth Management strategist
Frederik Ducrozet.
– Vaccine hopes –
The ECB’s last round of projections in September forecast 3.1 percent
quarter-on-quarter growth in the fourth quarter of 2020.
That number has become outdated after countries reintroduced virus
restrictions that once again shuttered businesses and kept people at home
across the 19-nation bloc, unravelling a recovery that had started over the
summer.
On the bright side, successful vaccine trials have raised expectations
that mass inoculations could start in Europe in early 2021, slightly behind
Britain and the United States, paving the way for a reopening of the world’s
economies.
“The more positive prospects on the back of recent vaccine news could lead
to an upward revision of the ECB’s growth projections” for the second half of
2021, said ING bank economist Carsten Brzeski.
But policymakers are acutely aware that any upsets in the Covid-19 vaccine
rollout could again derail the economy.
“The recovery may not be linear, but rather unsteady, stop-start and
contingent on the pace of vaccine rollout,” Lagarde has said.
The uncertain outcome of EU-UK talks on post-Brexit trade after December
31 adds another risk to the outlook.
– Negative inflation –
Lagarde can expect to be grilled on Thursday about the ECB’s ongoing
struggle to push inflation up to its target of just below two percent.
Eurozone inflation remained at -0.3 percent in November, Eurostat data
showed, the fourth consecutive month of falling prices.
But even before the pandemic, inflation stayed stubbornly low, fuelling
calls for a rethink at the ECB.
Pursuing a less strict inflation target would follow in the footsteps of
the US Federal Reserve, which recently pledged more leeway, allowing
inflation to rise above 2.0 percent.
The topic is a key part of the ECB’s “strategy review” launched under
Lagarde and set to be concluded next year.
“The eurozone economy needs fresh support to get through the second
lockdown and to start a recovery next year,” Brzeski summed up.
“However, this is not a crisis in which monetary policy is the main actor but
fiscal policy. The ECB is very well aware of this situation and knows that
excessive new monetary stimulus will hardly be a gamechanger for the
economy.”
BSS/AFP/MSY/0909 hrs