ECB Keeps Monetary Stimulus on Track Amid Recession Concerns -- 2nd Update
By Tom Fairless
FRANKFURT -- The European Central Bank will keep its aggressive
monetary stimulus in place and lag the Federal Reserve in phasing
it out, ECB President Christine Lagarde said, as the eurozone
wrestles with a fresh wave of Covid-19 infections that likely
tipped the bloc back into recession early this year.
A resurgence of the pandemic in Europe and a sluggish rollout of
vaccines have kept businesses shut across swaths of the Continent,
driving a divergence with the U.S. economy, which is benefiting
from a hefty dose of government spending and speedier Covid-19
At a news conference, Ms. Lagarde said the eurozone economy
wouldn't return to its pre-pandemic size until the second half of
next year. That would be more than a year after the Congressional
Budget Office expects the U.S. economy to have regained its
Divergence between the ECB and Federal Reserve, arguably the
world's two most influential central banks, has sweeping
implications for the prices of bonds and other financial
"If you look at where the Fed is, and where we are, if you look
at expectations in the United States and the euro area, we are not
on the same page," Ms. Lagarde said.
Federal Reserve policy makers will meet on April 27-28 to
consider their next move. The Fed recently signaled that, unlike
the ECB, it wouldn't try to check a recent rise in Treasury yields,
prompting them to rise further. But Fed officials in recent weeks
have pushed back on the notion that signs of a strong economic
recovery had boosted the prospects of a rate increase this
The ECB said in a statement Thursday that it would keep its key
interest rate at minus 0.5% and continue to buy eurozone debt under
an emergency EUR1.85 trillion bond-buying program, equivalent to
$2.2 trillion, through at least March 2022. It said it would buy
those bonds at a "significantly higher pace" during the first
months of this year, repeating a pledge made last month.
The ECB's recent actions have helped to slow a rise in
sovereign-bond yields across Europe this year. Higher bond yields
partly reflect brighter economic prospects, but also a spillover
from the robust recovery in the U.S. They put pressure on European
governments, which are increasing spending to support workers and
firms hurt by virus-related shutdowns.
The eurozone economy is likely to grow at an annualized rate of
6% in the second quarter of 2021, after contracting 1% in the first
three months of the year, according to JPMorgan. The U.S. economy
will likely grow at an annualized rate of almost 10% in the second
quarter after around 5% in the first quarter, JPMorgan said.
Ms. Lagarde signaled that the ECB isn't yet ready to discuss
winding down its giant bond-buying program, a step already
announced by Canada's central bank on Wednesday. Very high debt
levels in some European countries -- particularly in the south,
where debt is more than 150% of gross domestic product -- leave the
eurozone especially vulnerable to rising borrowing costs.
While Europe's manufacturing sector is recovering, supported by
solid global demand, consumers remain cautious.
Bank lending data published by the ECB this week suggested
tightening credit standards for businesses and lower demand for
borrowing, an ominous signal for the recovery. Europe is also
preparing for major elections in France and Germany over the next
12 months, which could upend government spending plans.
ECB officials are expected to reconsider the pace of their
bond-buying program at a policy meeting on June 10, when they will
also publish fresh forecasts for growth and inflation. Any move to
adjust the pace of bond purchases will be tricky without fueling
market volatility, said Marco Valli, head of Macro Research at
UniCredit Bank in Milan.
"We wouldn't be surprised to see [the ECB's emergency bond]
purchases continue throughout 2022, and interest rates remain at
current levels until the middle of the decade," said Jack
Allen-Reynolds, an economist with Capital Economics in London.
Still, vaccination rates across Europe have picked up as supply
bottlenecks eased, approaching U.S. speeds in places, and recent
economic surveys suggest business confidence is trending
Governments in Germany and Italy have signaled they are willing
to run large deficits this year as they spend more money to support
their economies, noted Andreas Billmeier, European economist at
Western Asset Management.
"This gives you medium term confidence that we're not going to
repeat the error of 10 years ago," when European governments sought
to reduce spending too quickly, hurting the economic recovery, Mr.
Write to Tom Fairless at firstname.lastname@example.org
(END) Dow Jones Newswires
April 22, 2021 13:26 ET (17:26 GMT)
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